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The GDP growth forecast for 2019 has also been revised downwards from 3.2% to 3%.

The GDP growth forecast for 2018 has been adjusted downwards to reflect somewhat stronger than previously expected decline in Latvia's financial sector activity and the decreasing optimism in the external environment, partly offset by the solid performance of Latvia's economy reported in the first quarter, the Bank of Latvia said.

The solid growth observed in 2017 continued in the first quarter of 2018. It was supported by private investment and more active absorption of the European Union funds, as well as robustly growing household real income and further favorable impact from the major foreign trade partners.

"Annual growth in 2018, however, is expected to be slightly lower than in the previous year. The beginning of the year was marked by declining optimism in the external environment as well as heightening geopolitical risks. Additional obstacles to higher growth also emerged in the domestic environment, in relation to the developments in the financial sector. While there was a continuous decline of business activities related to servicing foreign clients in 2017, the decline is likely to accelerate in 2018 as a result of the stepped up efforts to eliminating business with risky customers and de-risking of the financial sector. Moreover, several sectors are facing supply side constraints and insufficient investment in production capacity could become a growth-dampening factor," the Latvian central bank said.

In 2017, the Latvian GDP grew 4.5%.

The average annual inflation forecast for 2018 remains unchanged at 2.9% but the Bank of Latvia has revised upwards the forecast for 2019, raising it to 2.9% from the previous estimate of 2.6%.

"Despite oil prices growing faster than expected, this was partly offset by the strengthening of the euro against the US dollar. Moreover, the upward pressures of higher energy prices on inflation was partly offset by the deceleration of food prices in combination with a larger-than-expected impact of the reduced value added tax on vegetables and fruit typical of Latvia. Therefore, the inflation forecast for 2018 has been left unchanged," the Latvian central bank said in its latest Macroeconomic Developments Report.

"The rise in oil prices has already passed through to fuel prices, while there is a lag in the pass-through to other items which justifies an upward revision of the inflation forecast for 2019. The gradual strengthening of the domestic inflation pressures has been in line with the expectations," the Bank of Latvia said.

"The impact of the domestic demand on inflation is growing stronger. Base inflation (excluding taxes, food, energy and administratively regulated prices) in 2018 is going to be nearly twice as high as in 2017. Base inflation may remain high also in 2019, reflecting the growing labor costs and the indirect effect of rising oil prices," the central bank said.

The average annual inflation in Latvia in 2017 was 2.9%.