The Bank of Latvia lowers GDP growth and inflation forecasts for this year

The Bank of Latvia lowers the inflation forecast for this year to 1.5%

The Bank of Latvia has reduced the annual average inflation forecast for this year to 1.5%, as opposed to the 2% predicted in December, Uldis Rutkaste, head of the Monetary Policy Department of the Bank of Latvia, said in a discussion organized by the Bank of Latvia on Wednesday.

He explained that the inflation forecast is most significantly affected by significantly lower global natural gas prices.

On the other hand, the annual average inflation forecast for 2025 has been reduced to 1.9%, as opposed to the 2.3% forecast in December, while the inflation forecast for 2026 has remained unchanged at 1.8%.

Rutkaste explained that in the medium term, inflation will continue to be affected by persistent wage growth, which prevents core inflation, or inflation excluding energy and food prices, from falling as fast as headline inflation. The increase in labor costs creates risks for the growth of the Latvian economy and the sustainability of competitiveness.

The Bank of Latvia expects that the core inflation in Latvia will be 4% in 2024, 3.6% in 2025, and 2.9% in 2026.

Although inflation has also significantly decreased globally, the challenges for the further development of the world economy are still significant – uncertainty in the world remains at a high level and events show an increase in geopolitical tension, said Rutkaste.

Inflation and economic growth in the Eurozone are predicted to be lower than in the December forecasts, and although the Council of the European Central Bank continues to implement a restrictive monetary policy, financial markets expect that the turning point is not far away, so financial conditions in the Eurozone have already become more favorable.

Also, Rutkaste added that, despite the expectation of lower interest rates in the future, caution can be felt in the banking sector, both from the side of credit demand and supply.

The Bank of Latvia has reduced the GDP growth forecast for this year to 1.8%

The Bank of Latvia has reduced the gross domestic product (GDP) growth forecast for this year from the 2% predicted after December to 1.8%, said Uldis Rutkaste, head of the Monetary Policy Department of the Bank of Latvia, in a discussion organized by the Bank of Latvia on Wednesday.

At the same time, the Bank of Latvia has maintained the GDP growth forecast for 2025 at 3.6%, while the growth forecast for 2026 has been maintained at 3.8%.

The Bank of Latvia expects that the increase in exports will provide greater growth potential as the economic environment in foreign countries improves.

Rutkaste explained that the growth of Latvia’s national economy is expected to be sluggish this year, as demand in Latvia’s main trade partner countries is weak. In Latvia, low inflation allows consumption to recover and investments are supported by government investments, but external demand has weakened, so the GDP growth forecast has been reduced in the short term.

The assessment of the general government budget balance for this and next year has not changed significantly. On the other hand, at the end of the forecast period – in 2026 – the deficit is predicted to be larger, because larger government investments are expected than previously expected. For 2024, the budget deficit is predicted to be 4.1% of GDP, for 2025 – 3.4% of GDP and for 2026 – 2.3% of GDP.

The level of public debt has been adjusted upwards due to the expected weaker nominal GDP growth together with lower inflation. The national debt level for 2024 is predicted to be 44.3% of GDP, for 2025 and 2026, 45.2% and 45.7% of GDP, respectively.

Rutkaste explained that in the short term, more subdued activity in the manufacturing industry and the transport sector is expected due to weakness in external demand. The greater inertia of retail sales is maintained by a slow improvement in consumer sentiment, despite an increase in purchasing power. The vision of the Bank of Latvia regarding the growth of construction has not changed significantly – progress of large infrastructure projects financed by European Union (EU) funds and a gradual increase in investments in the private sector will support construction.

The unemployment forecast is slightly increased for the near term due to weaker economic activity. For 2024, it has been increased to 6.5% and for 2025 – to 6.3%, while in 2026 the unemployment rate is expected to be at the previously forecasted level of 6.1%.

The wage growth forecast has not been changed, the growth remaining above the long-term average growth, namely 8% for 2024, and 7.9% and 7.6% for 2025 and 2026, respectively.