Finnish Economist: Inflation in Latvia to Rise to 4%; Markets Expect Two ECB Interest Rate Hikes This Year
The conflict in the Middle East will be reflected in higher inflation, which could reach 4% in Latvia this year, according to Joona Widgrén, Senior Economist at Finland’s leading financial group OP Pohjola. According to the expert, the European Central Bank (ECB) is closely monitoring the impact of the conflict on the global economy and will not hesitate to raise interest rates if necessary. Markets currently anticipate that this could happen twice during the course of the year.
Inflation Will Affect Countries With High Oil and Natural Gas Consumption More Strongly
The previously forecast decline in inflation in Latvia is no longer expected, as the situation has been significantly altered by the conflict in the Middle East and the rise in oil prices, which in turn is driving price increases across several sectors. The economist stresses that the coming months will be crucial in assessing the true scale of inflationary pressures.
“We already saw a slight increase in inflation in the euro area in March, but so far it is not significant, and inflation remains close to the European Central Bank’s 2% target. However, the coming months will show how rapidly inflation could accelerate going forward,” says economist Joona Widgrén.
The impact of the Middle East conflict will be felt most strongly in countries where energy costs account for a larger share of consumer prices, including the Baltic states. Current forecasts suggest that inflation in Latvia will remain around 4% and will decline more slowly than previously expected. At the same time, the economist emphasizes that the rise in inflation is likely to be temporary, and inflation could stabilize again next year.
European Central Bank May Review Interest Rates Once or Twice This Year
Markets currently anticipate two to three base interest rate increases in the euro area this year. However, Widgrén considers a scenario of at least one, possibly two, interest rate hikes to be more realistic. At the same time, uncertainty surrounding interest rate developments remains high. If geopolitical tensions were to ease rapidly, the ECB could take a more cautious approach or even postpone further rate increases. There is also a possibility that market interest rates could decline in the future.
“The conflict in the Middle East is currently causing concern among business leaders. High oil prices affect a very wide range of industries, and their prolonged persistence at current levels could have a significant impact, especially on energy-intensive sectors. At the same time, from a macroeconomic perspective, business activity is even more strongly influenced by the European Central Bank’s interest rate policy, which directly
affects borrowing costs, investment decisions, and the pace of economic growth. However, we currently do not see this having negative impact on companies’ willingness to develop — modern business operates in conditions of constant geopolitical uncertainty, and companies are increasingly adapting to this reality while continuing to pursue their growth plans,” says Elmārs Prikšāns, General Manager of OP Corporate Bank plc Latvia Branch.
Impact of the Conflict on the Global Economy Expected to Be Limited; Oil Price Stabilisation Forecast for Summer
Despite geopolitical tensions, the global economy is expected to grow by approximately 2.8% this year, which is close to its long-term average. The impact of the conflict is significant but is currently still considered manageable. Nevertheless, the economist reiterates that the longer the conflict persists, the greater its impact on inflation and economic growth will be.
Oil price forecasts suggest that, if the situation stabilizes, prices could begin to decline gradually during the summer months.
“Our base-case scenario assumes that oil prices will decline gradually and could return to around USD 70 per barrel by the end of the summer. However, uncertainty remains high — a rapid resolution of the conflict currently appears unlikely, although it cannot be completely ruled out,” says Widgrén.
Speaking about positive developments in Latvia’s economy, Widgrén highlights that the expected recovery of the Swedish economy could boost demand for Latvian exports of goods and services.
About OP Corporate Bank plc Latvia Branch
OP Corporate Bank plc is the central bank of OP Pohjola, Finland’s largest financial services provider. It began operations in Latvia in 2012 and is currently one of the leading banks in Latvia in terms of loans issued to medium and large enterprises. OP Corporate Bank plc Latvia Branch provides financial services to leading companies in Latvia and plays a significant role in the long-term development of the country and the entire region.