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Estonia's Average Inflation May Exceed 2% This Year, Danske, Nordea Say

Estonia’s average annual inflation may exceed 2 percent this year on rising oil prices and increases in taxes and regulated prices, said economists at Danske Bank A/S and Nordea AB.

Inflation accelerated in May to 3 percent, the fastest pace in 15 months, the statistics office reported today. The central bank warned higher prices may hamper the Baltic nation’s recovery. Prices fell 0.1 percent on average last year.

Danske’s senior Baltic analyst Violeta Klyviene now expects average inflation of 2.3 percent this year and Nordea emerging markets’ analyst Annika Lindblad forecasts a range between 1.5 percent and 2 percent. Swedbank’s Maris Lauri is “very likely” to lift his 0.5 percent forecast and SEB AB’s Tallinn-based economist, Hardo Pajula, repeated his 2 percent-forecast.

“Global commodity prices remain the biggest risk to the Estonian inflation outlook as they are currently very volatile,” said Klyviene, who raised her forecast for the second time in a month, after changing it to 2 percent from 1.5 percent on May 7.

Estonia returned to price growth in March after a 10-month period of deflation as oil prices rose and improving exports helped the Baltic economy exit the second-deepest recession in the European Union. Inflation may peak in June and slow in the second half, the Finance Ministry said. The ministry in April forecast a 1.1 percent annual increase and a 0.8 percent increase in prices harmonized to EU terms.

‘Rather High’

“Inflation is rather high considering the deep recession last year and significant unused resources in the economy,” the central bank said in an e-mailed statement. The bank in April raised its forecast for harmonized inflation to 1.3 percent, after having forecast annual deflation of 0.4 percent.

Estonia is set to become the 17th country using the euro in January, even as the European Central Bank warned last month the Baltic country may struggle to keep inflation under control. European finance ministers will rule tomorrow that “Estonia fulfills the necessary conditions for the adoption of the euro,” according to a draft document obtained by Bloomberg News last week. Estonia will need “continued vigilance” on inflation, the document said.

“The inflation forecast will very likely have to be raised,” Swedabank’s Maris Lauri said in an e-mailed response to questions. “Reasons include external factors as well as administrative, such as the sales tax in Tallinn, and regulated prices that have increased more than expected.”

Administratively regulated prices increased 11.7 percent in May from a year earlier, while non-regulated prices grew 0.5 percent, the statistics office said. The Tallinn municipality this month introduced a 1 percent-tax on essential goods to compensate for shrinking revenue.

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

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