Latvia's anti-inflation plan is working and the overheated economy is not facing a "hard landing", Oskars Spurdzins, finance minister, told the Financial Times in an interview on Monday.

"We can see some potential risks but if the government implements all these measures [in the plan] we will achieve a soft landing," Mr Spurdzins said.

International financial institutions have named Latvia one of the countries that could be worst affected if global sentiment towards risk deteriorated further.

Latvia has drawn attention because its inflation is the highest in the European Union at 11.4 per cent last month, while its current account deficit represents 23.5 per cent of gross domestic product (GDP).

This has raised fears that Latvia's economy is boiling over and could face a devaluation of the lat, triggering knock-on confidence effects and currency turbulence in other new EU member states, such as Estonia, Lithuania and Bulgaria, which have also enjoyed fast rates of growth. Mr Spurdzins said measures announced in March to cool the real estate market and limit lending were already having an effect.

Last week the government also agreed a budget surplus of 1 per cent of GDP next year, following a revised plan for a 0.4 per cent surplus this year.

Mr Spurdzins said: "Of course we need to slow down economic growth but we have to keep it stable and quite high," pointing out that Latvia's GDP per capita was still little more than half the EU average.

He reaffirmed the commitment of the government and the central bank to the lat's tight peg to the euro, saying a decision had been taken not to make any changes. "We will keep the peg to the euro," he said. "There are some risks with a pegged currency but we also see some benefits from it."

Steep rises in inflation in the Baltic states have led the European Central Bank to call into question the use of fixed exchange rate systems such as currency pegs, which it believes may have exacerbated difficulties.

In a speech this month, Lorenzo Bini Smaghi, ECB executive board member, argued that the "key question" for eastern European countries was "How is it possible to keep inflation under control by pegging the exchange rate, which means adopting de facto the monetary policy of the euro area - especially since the euro area economy is growing at a rate less than a third of what a catching-up economy should aim to achieve?"

If currencies floated, central banks might be able to control inflation. But Baltic policymakers fear this would increase instability.

Source: Financial Times