Bank of Latvia Revises Macroeconomic Forecasts Downward

The Bank of Latvia has published updated macroeconomic forecasts reflecting the changing global economic environment. The primary driver of these revisions is the conflict in the Middle East, which has pushed up energy and other commodity prices.

ECB Decisions and Eurozone Outlook

The European Central Bank (ECB) decided on June 11 to raise interest rates by 25 basis points. The deposit rate now stands at 2.25%, the main refinancing rate at 2.40%, and the marginal lending rate at 2.65%. According to the ECB's forecasts, eurozone inflation will average 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Compared to March forecasts, the projections for 2026 and 2027 have been revised upward due to higher energy prices. Eurozone economic growth is forecast at 0.8%, 1.2%, and 1.5% respectively – lower than previously expected.

Inflation in Latvia

In Latvia, inflation over the next three years is projected in the range of 3.4–3.8%. It will be 3.6% in 2026, 3.8% in 2027, and 3.4% in 2028. These forecasts are higher than those from December 2025, when inflation was expected at 3.2% for 2026, 2.9% for 2027, and 3.6% for 2028. The main driver is the rise in global energy prices due to the Middle East conflict. Moreover, a prolonged conflict could also raise costs for food and industrial goods, though slower wage growth partly offsets this effect.

Labor Market and Wages

The labor market remains tight, although demand for labor is slightly decreasing due to weaker economic growth. The unemployment forecast has been marginally raised, but unemployment is expected to continue declining overall. Wage growth will remain strong, but slower than projected in December, influenced by lower labor demand and a weaker economy. However, high inflation will prevent a more rapid slowdown in wage increases.

GDP Growth

Latvia's GDP growth is forecast at 2.0% in 2026, 2.4% in 2027, and 3.0% in 2028. The previous forecast (December 2025) had figures of 2.8%, 2.9%, and 3.2% respectively. External shocks weaken foreign demand and increase caution, but investments in military production and other state projects provide some support. Pre-existing savings will help sustain private consumption, although its recovery has been postponed.

Fiscal Policy

The budget deficit this year will be slightly above 3% of GDP, but next year, as defense spending increases, it will approach 5% of GDP. Public debt levels will exceed 51% of GDP in the medium term. Fiscal policy will remain expansionary, and government investment plans will continue to support the economy.