Lithuanian Central Bank Sees Slow Inflation Paving Way to Euro

Lithuania’s inflation rate won’t scuttle the Baltic nation’s second bid to join the euro, Vitas Vasiliauskas said, predicting his nation would become the currency bloc’s 19th member on Jan. 1.

The central bank is expecting price growth of 1 percent or below this year, 1.5 percent next year and 1.9 percent in 2016, the central bank chief said in an interview in Athens yesterday. The country has made huge progress since 2006, when it was judged not ready for membership in the common currency because of concerns that prices weren’t stable enough, he said.

“Substantially we meet the criteria and we will hold on it,” Vasiliauskas said. The country also has a “big buffer” in meeting its public debt and budget deficit targets, he said.

Lithuania has incorporated slowing growth in Russia into its economic forecast already and doesn’t expect an additional slowdown related to tensions in Ukraine, he said. The Baltic nation also has taken steps to limit mortgage lending in a bid to prevent a real-estate bubble.

“We are prepared for any booming in the real-estate market,” Vasiliauskas said.

If the euro bid receives a green light in July, after reports from the European Commission and the European Central Bank, then Lithuania can immediately turn its focus to integrating its financial system into the currency bloc’s new banking union, he said. Lithuania’s banking system is dominated by Scandinavian lenders SEB AB, Swedbank AB and DNB ASA, Norway’s largest bank.

Stress Tests

Lithuania is talking with its banks and the ECB about how to manage the transition if it takes place on schedule, Vasiliauskas said. An asset-quality review could take place in coming months.

“We do not expect any surprises in our banking sector,” Vasiliauskas said. “If the decision will be positive, then in September we will be able to have results of the AQR, and of course then we will start with stress tests.”

The Frankfurt-based ECB already has begun an unprecedented health check of the euro-area’s biggest lenders before joint bank supervision starts in November. At least 1,000 auditors from firms including KPMG LLP and Deloitte & Touche LLP are currently scouring balance sheets across the 18-nation euro area at lenders as big as Deutsche Bank AG and as small as Malta’s Bank of Valletta Plc, looking for misvalued assets and erroneous accounting practices.