The Bank of Latvia has left its inflation forecast for 2023 at 9 percent, LETA was told at the central bank.
In the following years, Latvian inflation is expected to stay at around 2 percent. The central bank projects inflation at 2 percent for 2024, at 2.3 percent for 2025 and at 1.8 percent for 2026.
According to the central bank, the government’s decisions on raising indirect tax rates and on limiting the increase in electricity distribution tariffs are among the factors affecting inflation. However, the assumptions about lower than previously estimated global prices of natural gas, oil and food have affected both the downward revision of inflation forecasts and also the passthrough of global prices to core inflation.
Core inflation will remain persistently higher (3 percent–5 percent%) than headline inflation throughout the entire projection period due to the robust wage growth.
In the medium term, economic activity will spur the demand for labor. Owing to this demand, the wage growth will remain persistently high (above 7 percent) amid labor shortage.
The bank indicates that such long-lasting sharp wage increases that are higher than those recorded by trade partners and that exceed productivity growth reduce the cost competitiveness and increase the risk of a weaker performance of exports.
The Bank of Latvia’s representatives inform that, based on the European Central Bank’s (ECB) forecasts, inflation in the euro area is expected to decline gradually over the course of next year, before approaching the Governing Council’s 2 percent target in 2025.
The Governing Council considers that the key ECB interest rates (including the deposit facility rate of 4 percent) are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.
The ECB’s future interest rate decisions will be based on its assessment of the inflation outlook, including in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
The Governing Council decided to advance the normalization of the Eurosystem’s balance sheet, intending to reduce the pandemic emergency purchase program (PEPP) portfolio by an average of EUR 7.5 billion per month over the second half of the year.
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