Bank of Latvia maintains inflation outlook for 2023 at 9%

The Bank of Latvia has maintained the average inflation outlook for 2023 at 9%, as confirmed by the central bank’s representatives.
For the next three years the inflation outlook is around 2%. In 2024 Latvia’s annual average inflation outlook is 2%, in 2025 – 2.3%, and in 2026 – 1.8%.
Representatives of the Bank of Latvia explain that among the factors that affect inflation are the government’s decision to indirectly raise taxes, as well as decisions related to the restriction of the growth of electricity distribution tariffs. Nevertheless, both the downward revision of inflation forecasts and the shift to underlying inflation are mainly influenced by the assumptions for lower-than-previously estimated global natural gas, oil and food prices.

Base inflation remained sustainably higher (3-5%) across the entire forecast period than general inflation due to high wage growth, predicts the Bank of Latvia.

In the average term economic activity will increase demand for labour force. In light of a shortage of workers, wage growth remains strong – above 7%.
The Bank of Latvia explains that this lasting and rapid wage rise, which is more rapid than the one in Latvia’s trade partner countries and more rapid than the productivity growth rate, worsens cost competitiveness and increases the risk of weakening export contribution.
Representatives say that, according to the latest outlook from the European Central Bank, it is expected for inflation in Eurozone to gradually go down next year and eventually come close to the 2% target in 2025.
The Council of ECB believes the main ECB interest rates, including the interest rate on the deposit facility, which is currently 4% or a level that, if maintained for a sufficient period of time, will significantly contribute to the achievement of this objective.
Future decisions in regards to interest rates will depend on inflation perspectives, including the dynamics of core inflation and the transmission power of monetary policy.
The Council of ECB decided this week to continue the normalisation of the Eurosystem’s balance sheet, with a view to starting a reduction of the interim pandemic asset purchase programme portfolio by an average of EUR 7.5 billion per month in the second half of 2024.
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