Latvia: what central bank economists are really signalling

Latvia: what central bank economists are really signalling

Economists at the Bank of Latvia point to a year of moderate growth accompanied by persistent domestic inflation, rather than a return to low-inflation normality.

According to the latest Bank of Latvia projections, GDP growth in 2026 is expected to reach 2.8%, while inflation is forecast at around 3.2%, with core inflation remaining elevated at close to 4%. This signals that price pressures are increasingly home-grown, not driven by energy or external shocks.

As Bank of Latvia economist Andrejs Bessonovs notes in his analysis of food prices, “domestic pressure on prices has not weakened”. He highlights rapid wage growth — around 8–10% annually in recent years — as a key factor sustaining demand and allowing producers and retailers to fully pass higher costs on to consumers. This dynamic reinforces second-round wage–price effects, even in the absence of strong economic growth.

Fiscal analysis from the Bank of Latvia reinforces this picture. Economist Linda Oliņa shows that government spending has structurally shifted to a higher level, reaching 45.6% of GDP in 2024, up from around 40% before the pandemic. She stresses that “the increase in public expenditure is no longer a temporary response to crises, but a longer-term trend”, driven mainly by defence, social protection and healthcare.

These spending priorities are labour-intensive and add further pressure to an already tight labour market. Unemployment is expected to remain close to its natural level, at around 6.5%, while wage growth continues to outpace inflation. At the same time, budget deficits are projected to stay above 3% of GDP, with public debt rising towards 50% of GDP over the medium term.

Taken together, the Bank of Latvia’s economists do not foresee a sharp downturn. Instead, they signal a policy-supported growth model that sustains activity and incomes, but at the cost of persistent domestic inflation, rising labour costs and shrinking fiscal room for manoeuvre.BSM © 2025 | balticfocus.org/

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