Foreword

However, in comparison to the 2008 economic crisis, there are clear differences: not only did we avoid dramatic and comprehensive austerity measures, but sizeable support was provided to people and companies to overcome the crisis with less distress. As a result, the Latvian economy recovered to the pre-crisis level as early as in 2021.

2021 started with deflation. During the year, inflation kept rising at an accelerating pace, mainly due to higher energy prices, reaching its highest level in nearly a decade. Similar trends dominated not only the euro area and the world at large. It prompted economic policy makers to consider reviewing their employed support instruments. Like many other major central banks, the ECB started signalling a stricter monetary policy earlier than expected. This is a turning point that reminds countries about the size and thus the service cost of their debt, when interest rates are about to rise.

The Governing Council of the ECB has decided to phase out various asset purchase programmes and to normalise its monetary policy. It is now safe to say that the era of low interest rates is coming to an end. Monetary policy will be implemented prudently and gradually to prevent the financing conditions from changing too quickly and to protect euro area businesses and people during a period when the recovery from COVID-19 challenges is still ongoing. The Russian invasion of Ukraine has resulted in higher inflation and lower growth risks, which contribute to uncertainty and make monetary policy decisions more difficult. I would like to underline that, as before, euro area monetary policy decisions will be made gradually, maintaining optionality and flexibility. It will be founded on data based on the current economic situation and outlook in order to achieve the 2% euro area inflation target over the medium term, as set out in the new monetary policy strategy adopted in the summer of 2021.

However, we should remember that monetary policy is only one of the policies that affect economic activity and inflation, and that other policies are just as important. In some cases, they may even be more effective. For example, the current increase in energy prices could be better addressed with targeted support policy for the energy sector. Moreover, economic overheating risks in Latvia could be better mitigated with a suitable national fiscal and structural policy (including the construction sector), rather than euro area monetary policy.

As for developments at Latvijas Banka, in 2021 we laid a strong foundation for the future. A new Law on Latvijas Banka was adopted. It will provide a framework for the central bank and the financial supervisor, FCMC, to function as a single entity starting 1 January 2023. Preparations for the integration of the FCMC were started in 2021. We made major changes in the central bank’s governance model by discontinuing the Board and transitioning to a single-tier top level management. Thereby we are continuing our policy of ensuring efficient operation of the central bank to achieve greater and better results with the same or fewer resources.

We have completed several important steps, such as developing the instant payment infrastructure by introducing advanced and innovative technological solutions, and attracting new participants from the private sector, and as of the beginning of 2022, also from the public sector (the Treasury ). As for cash, to ensure the financial inclusion and security of society, we have reached a historic agreement with the financial sector on maintaining the availability of cash via the ATM network. In the future, Latvijas Banka will maintain its focus on this issue, ensuring the availability of choice of payment options. It will be facilitated by the introduction of the digital euro. This euro area project is well under way, with the participation of the Latvian financial technology sector.

Sustainability is increasingly prominent on the agenda. In the euro area, it is facilitated by the updated monetary policy strategy to include aspects related to climate change. At the national level, Latvijas Banka has adopted its first sustainability strategy, which outlines the directions of our operational sustainability, i.e. sustainable monetary policy, financial system, cash circulation, management of foreign reserves and other financial investments and a sustainable institution in general. This is not just a whim – sustainability guides our everyday actions and our institutional vision.

As usual, 2022 will be another active year for Latvijas Banka: this applies both to the challenges of monetary policy and preparations for a suc- cessful FCMC integration. We aim to ensure a fully-fledged integration of both entities for a smooth and seamless transition on 1 January 2023. We will continue to be active in our traditional areas, such as expanding the scope of innovative payment solutions and instant payment requests for the benefit of companies and people, as well as securing the availability of cash in the entire territory of Latvia. We will continue our focus on economic research and will facilitate wider use of new types of statistical data, such as card payment data, in the analysis of economic develop- ments to help economic policymakers make sound decisions.

2022 started with the Russian invasion of Ukraine, allowing us to appreci- ate the choices that were made since the restoration of our independence, including the ascension into the European Union, the euro area and NATO. The West, including Latvia, is united in taking measures against the aggressor in the form of unprecedented economic sanctions. They will affect the Latvian economy, but it is a small price to pay for our freedom, independence, and democracy.

I would like to wish all of our society and all of our Latvijas Banka colleagues peace of mind and a fruitful year ahead with many ambitious plans. Thank you for your contribution in 2021, and let us keep going full steam ahead! The key to our success and our strength lies in our collective efforts – together we are much stronger than each individually.