Macroeconomic Projections | June 2026

16.06.2026.

Information for the media

Latvijas Banka has published its latest macroeconomic projections (prepared in June 2026). Disturbances in the external environment are weakening the economy's growth prospects and causing inflation to remain higher. Similar developments are being observed elsewhere in Europe and the world.

Developments in the Eurozone

According to the baseline scenario of the latest European Central Bank (ECB) projections, total inflation in the eurozone will average 3.0% this year, 2.3% in 2027, and 2.0% in 2028. Compared to the March 2026 projections, the inflation forecast for 2026 and 2027 has been raised due to higher energy prices.

According to the baseline scenario, the eurozone economy will grow by an average of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. Accordingly, downward corrections have been made for 2026 and 2027, reflecting the stronger impact of armed conflict on raw material markets, real incomes, and confidence.

Taking into account inflation trends and forecasts, the ECB Governing Council decided on June 11 to increase all three main interest rates by 25 basis points. The deposit facility interest rate, the main refinancing operations interest rate, and the overnight lending facility interest rate were raised with effect from June 17, 2026, to 2.25%, 2.40%, and 2.65%, respectively.

In making this decision, the ECB Governing Council emphasized that it would carefully monitor the situation in the global economy and be ready to act accordingly, deciding on this at each meeting. The ECB Governing Council is currently not providing forward guidance on the future direction of interest rates.

Developments in Latvia

Inflation
: domestic price increases are driven by global energy resource prices, which will affect core inflation with a lag.

Due to the armed conflict in the Near East, inflation risks have become significantly upward, as tensions can affect not only energy resource prices but also the production costs of food and other goods, as well as inflation expectations.

Inflation is projected at the 3–4% level 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 be 3.2% in 2026, 2.9% in 2027, and 3.6% in 2028.

The inflation forecast has been increased, primarily reflecting the rise in global energy resource prices associated with the armed conflict in the Near East. The prolongation of the conflict and supply disruptions could increase the cost not only of energy resources but also of food production, mineral fertilizers, and petroleum refining by-products widely used in industry. This factor's impact is mitigated by somewhat slower wage growth in recent quarters.

Labor market
: the labor market remains tight, although demand for labor is slightly decreasing due to weaker economic growth.

The unemployment forecast has been slightly raised. The supply of labor is not increasing significantly, as the rise in the economic activity of the population only partially compensates for population aging and the impact of migration flows. At the same time, demand for labor is decreasing only slightly, so the labor market will remain tight and unemployment will continue to decline during the forecast period.

Wage growth will remain strong, although it is projected to be slightly slower than estimated in December. This will be determined by weaker economic growth and more moderate demand for labor. At the same time, higher inflation will limit the deceleration of faster wage growth.

GDP
: disturbances in the external environment worsen the economy's growth prospects.

Disturbances in the external environment are weakening external demand and increasing caution among consumers and investors. In turn, investments in the production of military and dual-use goods, as well as the implementation of other significant state projects, are becoming an increasingly strong support for growth, allowing the maintenance of a moderate growth forecast. Thus, GDP growth is expected to be slower in the coming years, but still positive – 2.0% in 2026, 2.4% in 2027, and 3.0% in 2028. In December 2025, GDP growth was projected at 2.8% in 2026, 2.9% in 2027, and 3.2% in 2028.

The impact of the armed conflict in the Near East is increasing the costs of transportation, fuel, packaging, mineral fertilizers, etc. Currently, farmers, manufacturers, traders, and other economic participants are absorbing the increase in costs largely at the expense of profit margins and previously stocked intermediate goods in warehouses (the "new normal" approach after the pandemic). Thus, part of the cost increase as a real burden will materialize only in the next stage of raw material procurement.

Previously accumulated savings will amortize new waves of caution, helping to maintain moderate private consumption growth. The faster recovery of consumption, which was previously projected, must again be postponed – mainly due to geopolitical disturbances.

The background of uncertainty will slow investment growth, but overall, the high investment level achieved last year will be maintained and even strengthened in 2028. This relative stability will be supported by several factors: investments in the production of military goods, the tightening of housing construction, and large government investment plans and defense expenditures.

Fiscal policy will remain stimulative in the medium term.

The budget deficit for this year is projected to be slightly above 3% of GDP, with the assessment remaining significantly unchanged compared to previous projections. Legislative changes providing for the maintenance of high defense expenditures in the future, as well as large-scale military equipment deliveries next year, will increase the projected budget deficit, bringing it closer to the 5% of GDP level.

The increase in budget expenditures in the coming years will strengthen the need to borrow, and the state debt level will exceed 51% of GDP in the medium term.

Macroeconomic indicators: Latvijas Banka projections

actual

Economic activity
(year-on-year change; %; constant prices; seasonally adjusted data)

GDP

2.1

2.0

2.4

3.0

Private consumption

0.7

2.1

2.7

3.0

Government consumption

5.9

0.7

1.2

1.5

Investments

9.4

2.2

1.5

5.6

Exports

0.1

0.7

2.7

3.3

Imports

5.7

0.2

3.6

Inflation
(year-on-year change; %)

HICP inflation

3.8

3.6

3.8

3.4

Core inflation (excluding food and energy prices)

3.5

3.3

4.0

4.3

Labor market

Unemployment (% of economically active population; seasonally adjusted data)

6.9

6.7

6.5

6.3

Nominal gross wage (year-on-year change; %)

7.7

7.4

7.3

7.5

External sector
(% of GDP)

Current account balance

–3.4

–4.6

–4.2

–4.4

Government finances
(% of GDP)

Budget balance

–2.5

–3.3

–3.9

–4.8

General government debt

46.9

47.9

51.3

51.2

Projections were prepared using information available up to May 27, 2026 (for some technical assumptions – up to May 21).