Macroeconomic Forecast Estonia

Estonian consumer prices fell by a record 2.2% y-o-y in October, marking the sixth consecutive month in which deflation has been recorded. Housing and utilities were the key factors driving deflationary pressures further in the month, with the component contracting by 5.6% y-o-y in October, down from 0.5% inflation in the previous month. Rental costs had fallen by roughly one-third in annual terms in October, while heating costs were down 11.0% y-o-y on the back of lower natural gas and oil prices. Going forward, we maintain our view that inflationary pressures will remain very weak, with domestic demand destruction, fiscal tightening and deleveraging keeping consumer price growth below 1.0% through the end of 2010.

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