Estonia raises inflation forecast, further dimming euro entry

Estonia's Finance Ministry raised its inflation forecast for this year and next, putting further strain on the Baltic country's efforts to adopt the euro as soon as possible, Bloomberg informed.

Prices will probably rise 4.9% this year and 5.2% in 2008, the ministry said in its semi-annual review released at a news conference in the capital Tallinn today. In August, it forecast 2007 inflation of 3.9% and 4.2% next year. „The reason for high inflation levels this year is on one hand the speed-up in income growth due to robust economic growth and a marked decline in unemployment, and on the other hand the housing-related administrative price increases,” the ministry said in a statement accompanying the review. It said inflation will also be further boosted by increases in excise duties at the start of 2008.

Inflation, which stood at 4.7% in February, has been pushed up by double-digit growth of Estonia's $15.1-billion economy in past seven quarters, jumping beyond levels needed for adopting the euro. Central Bank Governor Andres Lipstok said on March 12 Estonia will be unable to make the currency switch, already twice delayed, before 2010. Lipstok's initial target date looks questionable after the ministry also raised its inflation forecast for 2009, the year when Estonia will have to meet the inflation criteria to be able to join in 2010, to 4.4% from the previous forecast of 3.2%. The ministry also said at a press conference that bringing the inflation rate to levels required by the EU for euro adoption is unlikely through 2011. Estonian Finance Minister Aivar Soerd said at the press conference that the key to Estonia's ability to control inflation in the coming years is maintaining a „tight fiscal policy.”

Government policy calls for the euro to be adopted as soon as possible, after firm targets for that goal were twice delayed in 2006. Ongoing coalition talks after March 4 elections have indicated no change in that policy. All euro candidates need to keep price increases to within 1.5 percentage points of the 12-month average inflation rate of the three EU nations with the slowest consumer-price growth. In December, the EU limit in the 27-nation bloc was 2.86%, compared with Estonia's 12-month rate of 4.4%.

Economic growth, the European Union's second-fastest, has been bolstered by consumer spending thriving on unemployment at 14-year lows and a 17.5% increase in wages during the Q4. GDP will expand 9.2% this year and 8.3% next year, the ministry forecast today, after expanding a record 11.4% in 2006. In August, it forecast growth of 8.3% for 2007 and 7.7% for 2008. The ministry also forecast the general government budget surplus, including social security and state and municipal spending, to come in at 1.9% of gross domestic product as growth boosts state revenue.

The figure exceeds the previous forecast of 1.5%, but below last year's 3.3% of GDP. Central Bank Governor Lipstok said on March 12 he expects the budget surplus to be maintained at 2006 levels of 3%, echoing calls from the EU on February 13 that Estonia should run a higher-than-planned budget surplus this year to cool economic growth.

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