01.01.2005

Latvijas Banka pegs the lats to the euro

By pegging the lats to the euro with the peg rate EUR 1 = LVL 0.702804 and a ±1% fluctuation band, Latvijas Banka took the first step towards the euro as Latvia's future currency.

To become a euro area member state, the criteria specified in the Treaty on European Union or the Treaty of Maastricht (1992) had to be fulfilled.

One of the criteria is the joining of the national currency to the Exchange Rate Mechanism II (ERM II). The ERM II is a system whereby the Member States seeking to adopt the euro peg their national currencies to the euro. Within the framework of the ERM II, each Member State preparing for the euro changeover must ensure a stable national exchange rate.

By pegging the lats to the euro with the peg rate EUR 1 = LVL 0.702804 and a ±1% fluctuation band, Latvijas Banka took the first step towards the participation in the ERM II and eventually the euro as Latvia's future currency.

As Latvia's trade and economy overall became increasingly more linked to EU countries, Latvia decided to re-peg the lats from the SDR basket of currencies to the euro soon after its joining the EU. Setting the maximum fluctuation band for the lats exchange rate vis-à-vis the euro was in line with Latvia's long-term economic development trends and needs and allowed reducing the exchange rate risks and costs in transactions with the EU countries.