The Bank of Latvia

[x]

For your convenience, please select the section which will be the first to open when the website www.bank.lv is opened in the future..

You have selected the section

Should you wish to change your selection, open another section of your choice and click on the link "Next time start with...". Should you have any inquiries, please contact the webmaster at webmaster@bank.lv.

Bank of Latvia

1. Is the lats/euro peg rate beneficial for Latvia?
2. Will the lats exchange rate remain absolutely fixed or some fluctuations are possible after pegging the lats to the euro?
3. When will the euro be introduced as the national currency in Latvia ?
4. Which legislation of Latvia and the EU stipulates the re-pegging of the lats and introduction of the euro?
5. Will it be possible to purchase the euros at the Bank of Latvia cashier's offices?
6. When will the concurrent prices in lats and in euros be quoted for goods and services to get used to the calculation in euros and keep up with the transition of the prices from the lats to the euro?
 

1. 1. Is the lats/euro peg rate beneficial for Latvia?
It can be said that no optimal lats/euro exchange rate exists that would be equally beneficial for everyone in Latvia: a high exchange rate, just like a low one, has both its advantages and disadvantages. During the last ten years, while the lats has been pegged to the SDR basket of currencies, Latvia has developed with equal success with the lats exchange rate at 70 santims per euro and as low as 53 santims per euro.

Therefore the Bank of Latvia decided to peg the lats to the euro at the market rate, which means that the value of the lats was neither increased nor decreased: it was neither devalued, nor re-valued.

Most significantly, the results of the business and bank surveys conducted by the Bank of Latvia indicate that the rules of the "game": the time of the re-peg and the choice of the market rate were known well in advance, more than a year ago. Thus, economists could prepare for the projected changes by reviewing their currency positions and possibly redrawing contracts with their creditors and debtors.

A high exchange rate of the lats or strong lats:

  • means lower import prices and thus fosters reduction in domestic inflation;
  • facilitates imports, inter alia, of new technologies and equipment, thus contributing to the economic growth of Latvia;
  • increases the purchasing power of the residents of Latvia abroad. With respect to the negative aspects, a high exchange rate of the lats has at least a short-term negative impact on the sectors exporting their products to the EU countries.

A low exchange rate of the lats or weak lats:

  • in short-term facilitates the country's exports to the EU countries and hinders imports from these countries ;
  • simultaneously reduces the purchasing power of the residents of Latvia compared with the other EU countries;
  • acts as a factor intensifying the inflationary pressure.

Up

2. Will the lats exchange rate remain absolutely fixed or some fluctuations are possible after pegging the lats to the euro?
Although the EU Treaty provides for permissible lats fluctuations of ±15% of the set central exchange rate, the Bank of Latvia is planning to unilateraly limit the lats' exchange rate against the euro to ±1% of the central rate.

Thus first of all, the hitherto existing width of the fluctuation band against the peg currency, which is easy to understand and traditional in the financial markets, would be maintained. Second, the actually fixed exchange rate regime, which is favourable and has served the small open economy that is Latvia well, will not change.
Up

3. When will the euro be introduced as the national currency in Latvia ?
The plan for introducing the euro, approved by the Government of Latvia, stipulates that the euro could be introduced in Latvia at the beginning of 2008. Currently, this is the projected time frame for the introduction of the euro, which has emerged as a result of assessing when Latvia could introduce the single currency and comply with the participation criteria of the Economic and Monetary Union. At the same time, it should be borne in mind that the introduction of the euro in Latvia is an issue of multilateral relations among all EU Member States. Thus, the final decision on the potential introduction of the euro will be reached in multilateral negotiations. Following the multilateral negotiations with the EU institutions – the EU Council and the European Central Bank – as well as the EU Member States and the assessment of macroeconomic indicators of Latvia, the decision on the introduction of the euro will be made by the EU Council at the level of the Heads of States and Governments.
Up

4. Which legislation of Latvia and the EU stipulates the re-pegging of the lats and introduction of the euro?
Pursuant to the Treaty on European Union (http://www.ttc.lv/?id=62; 11992M), the Member States, Latvia among them, shall become the members of the Economic and Monetary Union (EMU) and adopt the euro, if they comply with the criteria stipulated by the Treaty.

As of joining the EU on May 1, 2004, the ten new member states are participants in the Economic and Monetary Union, as the Member States with derogation. They are not full-fledged EMU members and do not comply with the criteria set by the Treaty. It has been stipulated by Article 4 of The Act Concerning the Conditions of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic and the Adjustments to the Treaties on which the European Union is Founded; http://www.am.gov.lv/lv/eu/3749/4004/4008/. The derogation is defined in Article 122 of the Treaty establishing the European Community http://www.ttc.lv/lv/publikacijas/konsolidets.html.

The pegging of the lats to the euro for at least two years before the adoption of a single currency, thus ensuring the lowest possible fluctuations of the lats against the euro, is one of the mandatory criteria stipulated by the Treaty.

Pursuant to the Treaty on European Union, once every two years (or at the request of a Member State with a derogation) the Commission and the European Central Bank will assess whether the Member States with a derogation comply with the criteria stipulated by the Treaty. On the basis of this assessment, the EU Council will confirm which Member States fulfil the required conditions to become full-fledged EMU members and introduce the single currency.

On December 9, 2003, the Government of Latvia approved the time frame for the transition to the euro. Its Minutes Decision (http://www.mk.gov.lv/index.php/?id=50&page=330&action=d; TA-2549) stipulates the target dates for the lats re-peg and the compliance with the Maastricht criteria: January 1, 2005 and January 1, 2007, respectively. 
Up

5. Will it be possible to purchase the euros at the Bank of Latvia cashier's offices?
Safe and high quality euro banknotes will continue to be available at the Bank of Latvia cashier's offices. The cashier's offices are located in the central building of the Bank of Latvia in Riga and in the branches.
Up

6. When will the concurrent prices in lats and in euros be quoted for goods and services to get used to the calculation in euros and keep up with the transition of the prices from the lats to the euro?
The process is related to a later period: introduction of the euro, rather than to the change of the euro peg.

Namely, to reduce an unsubstantiated price hike due to the rounding of prices, businesses should quote the prices in both lats and euros for a certain period of time before the actual introduction of the euro. The Government should develop, on a timely basis, regulations for this process and stipulate the control measures to ensure a strict compliance with the regulations. We consider that the prices are to be quoted concurrently in lats and in euros when Latvia has undergone the trial period and has been invited to introduce the euro and it is established, whether the exchange rate equals the peg rate of January 1, 2005. According to the current plan it might be in mid-2007, half a year before the changeover of the lats to the euro.