Nov. 3 (Bloomberg) -- Latvia's average inflation rate will fall by more than half next year as the economy contracts 1 percent, central bank Governor Ilmars Rimsevics said.

Average inflation may decline to 7.5 percent from an expected 15.9 percent this year, and should go down to 4.5 percent in 2010, Rimsevics said at a conference in London today. The bank forecast on Sept. 29 a 2009 rate of 8.6 percent.

The Baltic country could adopt the euro in 2012, with 2011 also possible ``if inflation slows more,'' Rimsevics said.

Latvia is in a recession as lenders tighten credit and consumers' purchasing power is crimped by faster inflation, the European Union's highest at 14.9 percent in September. The $27.2 billion economy, the bloc's fastest growing last year, is considered by credit evaluators as one of the most vulnerable in the region to global financial turmoil due to its large current- account deficit.

Latvia's gross domestic product will contract 0.5 percent this year and lending growth will slow to 10 percent by December 2009 from 60 percent in January 2006 and 17.6 percent in September 2008, Rimsevics said.

``We are very confident that we can weather the storm even if the situation has changed,'' he said. ``The government and the Bank of Latvia stand read to provide liquidity support to domestic banks if needed.''

Local banks will have to refinance syndicated loans of about 1.2 billion euros ($1.5 billion) next year, which Rimsevics called a ``really small'' amount. ``By mid-next year, the financial situation will be better'' for refinancing the loans, he said.

``We expect to see more consolidation in the banking sector,'' Cecilia Hermansson, Swedbank's chief economist, said at the conference. Latvia has 26 lenders.

To contact the reporters on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net; Ott Ummelas in Tallinn at oummelas@bloomberg.net

Last Updated: November 3, 2008 11:40 EST