Latvijas Banka has revised its macroeconomic forecasts

Latvijas Banka has published its latest macroeconomic forecasts (prepared in December 2025). Gross domestic product (GDP) is expected to grow by 1.7% this year. Further economic recovery will be driven by investment, increasingly strong private consumption, and exports.

Developments in the euro area

• According to the latest projections by the European Central Bank (ECB), next year, both inflation and economic growth in the euro area are expected to be slightly higher than previously forecasted. Inflation in the euro area will reach 2.1% this year and will fall to 1.9% in 2026 (the September 2025 projections were 2.1% and 1.7% respectively).
• The decline in inflation is driven by the effect of falling energy prices which is expected to continue in 2027. In turn, 2028 will see inflation reach its 2% medium-term target.
• This development allowed the Governing Council of the ECB to keep the key euro interest rates unchanged again on 18 December. The interest rates on the deposit facility, the main refinancing operations, and the marginal lending facility will remain at 2%, 2.15%, and 2.4% respectively.
• The future interest rate decisions of the Governing Council of the ECB will also be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data as well as the dynamics of underlying inflation and the strength of monetary policy transmission.

Developments in the Latvian economy

Inflation: domestic price hikes are sustained by rising wages and persistently high food prices.

• The inflation data exceed the June forecasts, and wage growth is higher than previously expected; therefore, Latvijas Banka has revised the inflation forecast for 2025 upwards to 3.9%.
• Inflation is projected to stand at 3–4% in the next three years (3.2% in 2026, 2.9% in 2027, and 3.6% in 2028). In the revised June 2025 forecasts, inflation was projected to reach 3.4% in 2025, 2.1% in 2026, and 2.8% in 2027.
• Inflation hikes are driven by a stronger wage increase as well as the revision of administered tariffs and government decisions, including those to raise excise taxes. In 2028, the introduction of the second emissions trading system (ETS2) will exert additional pressure on prices.

Labour market: a tight labour market persists, and a sharper wage increase is expected.

• Compared to the June forecast, wage growth is projected to be slightly higher. This will mainly be driven by the increase in the private sector wage bill; however, the public sector remuneration has also risen noticeably faster than expected. The population's purchasing power will continue to strengthen as wages are growing more rapidly than the inflation rate.
• Labour demand remains resilient. In the medium term, it will also be supported by the implementation of upcoming large investment projects (including Rail Baltica). Unemployment will be low throughout the projection horizon, decreasing to 6.2% in 2028. This will be driven by improved employment expectations, the gradual recovery of the external environment, and the continued economic recovery.

GDP: stronger growth will replace the weak activity of the previous years.

• The GDP growth forecast has been revised upwards, projecting a 1.7% GDP rise for this year, mainly due to the new data.
• The future outlook remains broadly unchanged; however, with adjustments to the implementation prospects of some major investment projects, faster growth is expected in 2028 rather than in 2027.
• As consumer sentiment and financial well-being improve, private consumption becomes stronger. This will lead to more moderate accumulation of household savings in the medium term.
• Public and private investments constitute a stable pillar of the economy, further supported by rapidly growing lending. Investments in development drive changes in manufacturing, thereby increasing production capacity.
• In the coming years, the situation will improve as both domestic and external demand strengthen. Thus, GDP is expected to grow by 2.8% in 2026, 2.9% in 2027, and 3.2% in 2028. In the June 2025 forecasts, GDP growth was expected to reach 1.2% in 2025, 2.8% in 2026, and 3.2% in 2027.
• The economic sentiment indicator, which reflects changes in business and consumer sentiment, also points to economic recovery. Within the business cycle, the industrial, retail, and services sectors, as well as consumer sentiment, are currently in an upward phase.
• Amid declining global uncertainty about the impact of tariffs and a faster recovery in external demand, stronger export growth is expected. Meanwhile, challenges are posed by the rapid increase in labour costs in Latvia, as well as military conflicts and the associated uncertainty in the external environment.

Fiscal policy will remain supportive, encouraging consumption and investment.

• Consumption will be driven by the government's recent decisions on additional expenditures for defence and demography, as well as by wage increases for teachers.
• Towards the end of the projection horizon, public investment flows will increase owing to military supplies and Rail Baltica.
• The budget deficit will rise in the medium term, significantly affected by growing defence spending, particularly next year. The deficit is projected to be above 3% of GDP. The Council of the European Union has approved Latvia's request to activate the national escape clause, allowing it to deviate from the previously established expenditure growth path and to increase defence spending more rapidly than projected earlier.
• The stepped-up defence spending will be financed through borrowing. As a result, public debt will continue to rise in the years ahead, slightly exceeding 50% of GDP by the end of the projection horizon.

Macroeconomic fundamentals: Latvijas Banka's forecasts

 The cut-off date for the information used in the forecast is 3 December 2025, and 26 November 2025 for the information used in some technical assumptions.