Aspects of Inflation and Interest Rates in Latvia

In Latvia, unlike in the developed countries, higher inflation and interest rates as well as their higher fluctuations are observed; inflation rates often exceed interest rates. The research aim is to investigate several aspects of inflation and interest rates in Latvia. According to the present research, the large fluctuations of inflation rates are caused due to both differences in measuring inflation and fast growth or a recession in the national economy. With the Latvian lat being pegged to the euro, negative real interest rates turn to be an often phenomenon in Latvia, which may not be unambiguously viewed as a financial loss to an investor. Yet, a high inflation rate due to different weighting patterns for inflation calculation and the so-called B-S effect might prevent Latvia from meeting the Maastricht criterion of inflation.