Bank of Latvia has raised its inflation forecast for this year to 3.6%

RIGA - The Bank of Latvia has raised its average annual inflation forecast for this year from the previously projected 3.2 percent to 3.6 percent, said Uldis Rutkaste, Head of the Monetary Policy Department at the Bank of Latvia, on Tuesday while presenting the latest economic forecasts.

Meanwhile, the annual average inflation forecast for 2027 has been raised from the 2.9 percent projected last December to 3.8 percent, while the forecast for average annual inflation in 2028 has been lowered from 3.6 percent to 3.4 percent.

At the same time, the Bank of Latvia expects that core inflation - inflation excluding food and energy prices - will be 3.3 percent in Latvia in 2026, 4 percent in 2027, and 4.3 percent in 2027.

The Bank of Latvia notes that domestic price increases are driven by global energy prices, which will affect core inflation with a lag.

The Bank of Latvia also notes that due to the ongoing war in the Middle East, inflation risks have become markedly upward-biased, as tensions could affect not only energy prices but also production costs for food and other goods, as well as inflation expectations.

The Bank of Latvia explains that the inflation forecast has been raised, primarily reflecting the global rise in energy prices linked to the conflict in the Middle East. The prolongation of hostilities and supply disruptions could drive up the costs not only of energy resources but also of food production, mineral fertilizers, and petroleum byproducts widely used in industry. The impact of this factor is mitigated by somewhat slower wage growth in recent quarters.

Rutkaste explained that, compared to a year ago, food price inflation has fallen from nearly 8 percent to almost 0 percent, but in overall inflation, rising food prices have been offset by higher energy costs.

Martins Kazaks, President of the Bank of Latvia, said that to curb inflation, the European Central Bank (ECB) decided last week to raise rates by 0.25 basis points. He explained that uncertainty remains high due to the geopolitical situation, so the ECB will assess the current situation at each meeting.

He noted that while inflation is widespread, it is positive that second-round inflation effects are not visible in the labor market. Kazaks explained that "the shock is still fresh and the labor market is gradually absorbing it," but for now, we can expect second-round inflation effects to be weak.

Kazaks also emphasized that the current situation cannot be compared to 2022, as Latvia entered that year with higher inflation, whereas this year Latvia was on target for inflation.

"There is no reason to expect inflation of 10 percent in the eurozone or 20 percent in Latvia," said the President of the Bank of Latvia.

Kazaks expressed hope that a peace agreement regarding the Strait of Hormuz will be signed and shipping traffic will resume. He explained that the longer the Strait of Hormuz remains impassable, the more national reserves are depleted. Consequently, replenishing those reserves will take longer, which could keep oil prices high. The longer oil prices remain high, the greater the pressure on other prices, and consequently the greater the risk of second-round inflationary pressures.