Analytics, Banks, Direct Speech, Economics, EU – Baltic States, Financial Services, Latvia

At the same time, prices of several food products, e.g. buckwheat, cottage cheese and apples, continue rising. Consumers do not foresee deflation either: in May 2020, a much larger share of people surveyed in Latvia and the euro area overall expected prices to increase steeper rather than decrease. Moreover, oil prices have already bottomed out: Saudi Arabia and Russia, the world's largest oil exporters, have finally come to an agreement on oil output curbs. In addition, the demand for oil has increased as a result of gradual lifting of the measures taken to contain the spread of Covid-19. Over a month, the price of oil has doubled to 40 US dollars per barrel, and Latvian drivers have already seen some increase in the fuel prices.

Second, the European Central Bank (ECB) is keeping its finger on the economy's pulse to prevent a prolonged economic downturn which could lead to persistently low consumer prices and push the inflation expectations into negative territory. The ECB aims to keep inflation "below, but close to, 2% in the medium term", and is consistently signalling its commitment to employ all monetary policy instruments at its disposal to reach the above inflation target within the scope of its mandate.

The ECB is currently implementing several measures to support the euro area economic recovery. For instance, in response to the Covid-19 pandemic, the ECB launched a new asset purchase programme at the end of March. The envelope for the temporary pandemic emergency purchase programme was initially set to 750 billion euro, and on 4 June 2020 it was increased by 600 billion euro to a total of 1.35 trillion euro.

In order to overcome the Covid-19 crisis, the ECB policy has enabled the euro area governments, inter alia the Latvian government, to borrow funds in the financial market at a cheaper rate. Thus, the Latvian government is actively borrowing funds in the international financial market at a very low interest rate (close to zero) and is using these funds to support households and the overall economy. This means lower unemployment growth and a less pronounced decrease in income for businesses and individuals. Perhaps most importantly, it gives them a sense of belonging and safety. Finally, it should be noted that it is the euro area membership that has enabled the Latvian government to support the economy by means of additional expenditure, instead of tightening the belt as was the case in the crisis of 2009.