Inflation puts dent in Latvian public's savings

Latvia is among the last places in the European Union (EU) for savings, but high inflation lowers the value of savings even more, Latvian Radio reported on September 12.

The most common reason the Latvian public mentions for not creating savings is the low income and the fact that they live from salary to salary. Also, deposit interest rates were even negative in recent years, with the deposit rate at minus 0.5%. Last Thursday, the European Central Bank (ECB) raised its key base interest rate to 1.25% which will have a positive impact on future savings.

During the Covid pandemic, Latvian population's savings increased to EUR 9 billion. Andris Lāriņš, a representative of the Finance Latvia Association, said that after the abolition of the pandemic restrictions, savings are still rising but slower.

"According to the [Latvian central bank] Bank of Latvia, savings are still increasing in Latvia," said Lāriņš. "But of course, in anticipation of winter and price increases, we see the pace of stockpile increases shrinking, especially in the second half of the summer, which means that the cash buffer is for residents to somehow soften this high inflation, but one of the problems is that 80% of the money belongs to 20% of the population."

The Baltic States currently have the highest inflation rate in the euro area, around 20%, and inflation affects not only purchasing power but also deposits.

A study on population retention habits has recently been carried out by the insurance company ERGO. According to ERGO's head of life insurance products development, Kaspars Zvirgzdiņš, most of the population is aware of the importance of saving, but only 40% of those surveyed save.

“Two-thirds of people say saving is an important thing, 31% of people responded that it was worth thinking about it, but they don't have the money to do it,” Zvirgzdiņš said. "We had a question about how this year's events – war and inflation – affect your savings habits, and 5% replied that this year's events caused them to start saving. On the other hand, 22% have said that unfortunately, due to price increases and lack of free funds, they have stopped making savings."

Latvia has a large share of the population whose income does not exceed the minimum wage, but the Bank of Latvia's senior financial literacy specialist Aija Brikše says that those who can afford it don't save, either.

“Maybe 5 [euros] is a very small amount, but it can certainly be 10 euros a month that we can talk about. It can be 20 and 30 [euros],” Brikše said. 

"If we are talking about the other part of the population for which savings have been set up enough, then yes, this is certainly a good time to think about investment opportunities. There are lower-risk approaches: life insurance, pension level 3. Other financial instruments, such as shares and investment funds, can also be viewed as well, but it is certainly best to address either a licensed investment broker or a bank, and all possibilities to assess responsibly before taking their step and investing."

 

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