Central bank lowers GDP forecast, floats tax policy change

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Latvia's Central Bank said it was dropping its growth forecast for the country significantly Friday, blaming "uncertainty" in the external environment.

Central Bank governor Ilmars Rimsevics told journalists that the bank's GDP forecast was being reduced from 3.3% for the year to 2.9%

At the same time the annual inflation forecast was revised down to 0.7% from 1.1%.

"Since the beginning of the year we have seen some signs that economic growth is gradually slowing, unfortunately. This was demonstrated in the fact manufacturing output in the first half of the year was only 0.6% higher than a year earlier. 

"This was due to both internal factors, such as effect of [bankrupt steelworks] Metalurgs, as well as external events, which gradually began to affect Latvia's export performance," Rimsevics admitted.

"As for the future growth of the Latvian economy, the current forecast level of uncertainty is relatively high, and this is mainly due to the uncertainty in the external environment," he said.

Nevertheless even 2.9% would represent "one of the fastest growth rates in the euro area," he added.

In order to avoid more restrictions on growth in future, banks need to avoid the temptation to stop lending, the long-serving governor said.

He finished his summary with a clear warning to politicians not to promise spending they couldn't deliver as parliamentary elections loom on October 4.

Unfortunately, there is a feeling that the lessons learned painfully during the crisis may be forgotten.Today I would like to remind you and to send a strong warning to the public - living beyond your means is not acceptable."

In an innovative move Rimsevics also suggested introducing a rule that tax policy could only be changed once every four years in order to promote "stability and predictability"

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