Macroeconomic Forecast Estonia

We have revised up our 2010 average inflation forecast to 2.0% y-o-y, from an original 1.0%. This follows the sharp rise in consumer price growth to a 16-month high of 3.9% y-o-y in June, up markedly from -1.8% y-o-y seen at the end of 2009. While we have revised up our forecast, we maintain that the trend through the second half of the year will be disinflationary, as statistical base effects and weakening commodity prices weighs on headline CPI growth. Moreover, we maintain that underlying demand conditions in Estonia are unlikely to be conducive to drive price pressures through the medium term, with our average inflation forecast for 2010 holding at 1.7%.

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