Latvian central bank ups inflation forecast to nearly 15%

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On June 10 the Latvian central bank Latvijas Banka (LB) raised its inflation forecast for 2022 and 2023 – the central bank estimates consumer prices will rise by 14.8% this year instead of the previously estimated 9.5%, while next year – by 7% instead of the previously forecast 3.7%.

As the bank itself points out, its projections "have been drawn up in an environment of high uncertainty resulting from the unpredictable course of the war started by Russia and the related global price development."

The forecasts make mixed reading. While growth for 2022 is revised upwards from 1.8% to 2.9%, other indicators are much less encouraging.

The GDP growth forecast for 2023 has been revised downwards to 2.4% (March forecast was 3.2%), while in 2024, the expected improvement in confidence allows for forecasting recovery of the pace of economic growth to 4.2% (March forecast was 4.1%). But such distant forecasts are highly dependent upon how the war in Ukraine develops.

Inflation will continue to be a cause for concer. The central bank posted an upward revision of the inflation forecast for 2022 and 2023 to 14.8% and 7.0% respectively (March forecast was 9.5% and 3.7% respectively).

Inflation will then decline to 2.4% in 2024 (March forecast was 2.1%) on account of the expected fall in energy futures prices driven by the anticipated improvement of the geopolitical situation, the central bank said.

"Russia's invasion of Ukraine has significantly changed the economic environment, and the evolution of the warfare reinforces the current Covid-19 related disruptions in global supply chains, pressure from global energy, material and component prices, as well as uncertainty. In the light of the new circumstances, the euro area inflation forecasts have been revised upwards significantly in June, whereas growth rates have been reduced for this year and next year," Latvijas banka explained.

"The strong growth observed in the first quarter of 2022 underpins  GDP growth in the year as a whole. However, in the course of the year, towards the end of the year in particular, economic activity in Latvia might slow down significantly on account of the uncertainty stemming from the Russia-Ukraine war and the increases in costs and prices," it added.

More information about the latest forecasts is available at Latvijas Banka's website

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