Macroeconomic forecasts | June 2026

Latvijas Banka has published its latest macroeconomic projections (prepared in June 2026). External shocks dampen the outlook for the economic growth, while keeping inflation elevated. Similar dynamics are also observed across Europe and globally.

Developments in the euro area

• In the baseline scenario of the latest European Central Bank's (ECB) projections, headline inflation in the euro area is expected to average 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Compared with March, the projection for inflation in 2026 and 2027 has been revised upwards owing to a higher path for energy prices.
• The baseline scenario sees euro area economic growth at an average of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. This is a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes, and confidence.
• On 11 June, the Governing Council of the ECB decided to raise all three key interest rates by 25 basis points in view of inflation trends and projections. The interest rates on the deposit facility, the main refinancing operations, and the marginal lending facility were increased to 2.25%, 2.40%, and 2.65% respectively, with effect from 17 June 2026.
• With this decision, the Governing Council of the ECB emphasised that it would closely monitor the developments in the global economy and would be ready to act accordingly, based on a meeting-by-meeting approach. The Governing Council of the ECB is not pre-committing to a particular interest rate path.

Developments in Latvia

Inflation: domestic price increases are driven by global energy prices, which are expected to feed through to underlying inflation with a lag.

• Amid the ongoing war in the Middle East, risks to the inflation outlook have become clearly tilted to the upside, as tensions may affect not only energy prices but also the production costs of food and other goods, as well as inflation expectations.
• Inflation is projected to stand at 3–4% over the next three years (3.6% in 2026, 3.8% in 2027, and 3.4% in 2028). In the December 2025 projections, inflation was expected to stand at 3.2% in 2026, 2.9% in 2027, and 3.6% in 2028.
• The inflation projection has been revised upwards, primarily reflecting higher global energy prices amid the war in the Middle East. A prolonged war and related supply disruptions could push up not only energy prices but also the costs of food production, fertilisers, and petrochemical by-products widely used in industry. The impact of this factor is mitigated by somewhat slower wage growth in recent quarters.

Labour market: the labour market remains tight, although labour demand is easing somewhat in the context of weaker economic growth.

• The unemployment projection has been revised slightly upwards. Labour supply is not increasing significantly, as the rise in the economic activity of the population only partly offsets the effects of population ageing and migration flows. At the same time, labour demand is declining only modestly; therefore, the labour market is expected to remain tight, while unemployment will continue to decline over the projection horizon.
• Wage growth is expected to remain strong; however, it is projected to be somewhat slower than estimated in December. This will be determined by weaker economic growth and more moderate labour demand. At the same time, higher inflation will limit a more pronounced slowdown in wage growth.

GDP: external shocks are weighing on the economic growth outlook.

• External shocks dampen external demand and increase caution among consumers and investors. At the same time, investments in the production of military and dual-use goods, as well as the implementation of other major public projects are becoming an increasingly important driver of growth, helping to sustain a projection of moderate expansion. Hence, GDP growth is anticipated to slow in the coming years, but to remain positive at 2.0% in 2026, 2.4% in 2027, and 3.0% in 2028. In the December 2025 projections, GDP growth was expected to be 2.8% in 2026, 2.9% in 2027, and 3.2% in 2028.
• Owing to the ongoing war in the Middle East, the costs of transport, fuel, packaging, fertilisers, and other inputs are rising. At present, farmers, producers, retailers, and other economic agents are largely absorbing the increase in costs through profit margins and previously accumulated inventories of intermediate goods (reflecting the "new normal" approach adopted after the pandemic). Thus, part of the increase in costs will materialise as an actual burden only in the next stage of raw material procurement.
• Previously accumulated savings will cushion new waves of precautionary behaviour, thereby helping maintain moderate growth in private consumption. The stronger recovery in consumption projected earlier will need to be postponed again, mainly owing to geopolitical shocks.
• Against a backdrop of uncertainty, investment growth will slow; however, overall, the high level of investment reached last year will persist and will even strengthen in 2028. This relative stability will be supported by several factors, including investment in the production of military goods, a recovery in housing construction, large government investment plans, as well as increased defence spending.

Fiscal policy is expected to remain accommodative over the medium term.

• The budget deficit for this year is projected to be slightly above 3% of GDP, with the assessment broadly unchanged from previous projections. Legislative changes aimed at maintaining high defence spending also in the future, together with sizeable deliveries of military equipment in two years' time, are expected to increase the projected budget deficit, bringing it close to 5% of GDP.
• Rising budget expenditure in the coming years will increase borrowing needs, and the public debt ratio is expected to exceed 51% of GDP over the medium term.

Macroeconomic fundamentals: Latvijas Banka's projections

 The cut-off date for the information used in the projections is 27 May 2026, and 21 May for the information used in some technical assumptions.