Today the Council of Latvijas Banka, after a presentation of a report on the situation in Latvia's and global economy by macroeconomic analysis and forecasting experts, decided to revise upwards the inflation forecast for 2017.
Trends in global food prices and a year-on-year rise in oil prices suggest a higher-than projected increase in inflation this year. Latvijas Banka's inflation forecast for 2017 has been revised upwards to 2.7% (forecast of December 2016 was 1.6%).
January 2016 saw lower global oil prices over the last 12 years – about 30 US dollars per barrel. Since then oil prices have been on an upward trend, strengthening further at the turn of the year, with oil prices reaching 55 US dollars per barrel. This trend has already been reflected in fuel prices and is still going to drive the prices of other goods and services up.
The rise in food retail prices in Latvia has been supported by several factors:
- In the global market prices of dairy products, meat and sugar are on an upward trend, with cereal prices also joining in over the last few months. Global dairy product prices recorded a particular surge in the second half of 2016, albeit stabilising already in early 2017;
- An increase in the demand for raw milk also affected the situation in Latvia: it accounted for a higher increase in the farm-gate prices of raw milk in Latvia in comparison with the global dairy product prices.
At the same time, the demand-side pressure on inflation is not becoming stronger. Economy in Latvia is still in macroeconomic balance, with unemployment having been close to its natural rate already for four years. Only moderate growth is observed in non-administered service prices, which are supposed to reflect the impact of domestic demand. It is reflected in the core inflation measure (harmonised index of consumer prices, excluding food and energy) which will remain just slightly above 1% this year as well.
It should be noted that market liberalisation may cause a slightly faster-than-projected increase in the natural gas price this year (an assessment of individual components of natural gas tariff has been incorporated in the revised inflation forecast; nevertheless, the uncertainty is high).
According to Latvijas Banka's forecast, the growth of gross domestic product (GDP) will reach 3.0% in 2017 (in non-adjusted terms; 3.4% in seasonally and calendar adjusted terms as compared to the previous forecast of 3%).
Against the background of steadily growing disposable income of households and gradual improvement of the external environment in 2017, Latvia's economic growth will be supported by private consumption and exports. In the second half of the year, more substantial contribution is expected from investment, although partly offset by the expanding imports. An additional contribution to growth in 2017 will be also ensured by higher public consumption supported by the planned increase in budget expenditure, including a rise in public sector wages.
More detailed information about the latest forecasts is available in macroeconomic forecasts section of Latvijas Banka's website makroekonomika.lv.