Double-digit inflation is downside for Baltics in Euro club


New entrants to the eurozone are not regretting joining the fundraising group but are struggling with one of its challenges.

In the Baltic country of Estonia, inflation rose over a 12-year period of 12.2% in December. Nearby Lithuania is not doing well, with data this week showing inflation more than double the 5% increase.

He should not expect the monetary policy to benefit them anytime soon: The European Central Bank chief said on Tuesday that interest rates would increase “uncertainly” by 2022 as forecast indicates inflation would fall below the ECB’s 2% target. in the middle period.

This is in stark contrast to what is happening in non-eurozone countries, where central banks from Warsaw to Budapest are working aggressively to reduce inflation that has not been seen since communism.

If we had our monetary policy “we would be doing what Poland is doing and raising interest rates,” said Martins Abolins, an economist at Citadele Bank in Riga, the capital of Latvia, where consumer prices rose 7.9% last month.

Although mortgages have been “very low” in the Baltic region for many years without causing major economic downturns, the increase in household sales is alarming, “he said.

The concern is evident in Estonia, where the government is considering slowing inflation through budgets.

“If we have a single interest rate in the whole euro area, then the work of the national currency is to drive diversification,” Finance Minister Keit Pentus-Rosimannus told Bloomberg last month.

Lithuanian colleague Gintare Skaiste agrees, telling a news conference Wednesday that the issue of economic transformation has been on the agenda for the eurozone.

“Finding ideas that fit everyone is difficult,” Skaiste said. “Therefore, we must rely more heavily on international approaches that countries can adopt.”

Adding to the unrest, there is a sharp decline in labor in the region, with billions of euros in EU funding being expected to start soon.

Even so, the Baltic states are no doubt happy to have adopted the euro. In addition to economics and trade, the reforms helped to strengthen the Western culture of the 6 million people, just outside Moscow.

Being part of the euro zone has been “a huge boost,” according to Latvian Central Bank Governor Martins Kazaks, with whom his country has an alliance eight years ago.

“Look at a simple example of the crisis of 2008 and the crisis of 2020,” he said at an online event this week. “If at that time we did not have the opportunity to borrow and the economic transition was very painful, now it is a very different matter.”

Unlike places like Germany, there is little public outcry over current inflation, while many Baltic citizens have survived the rise in prices caused by the collapse of the Soviet Union.

In other words, the challenge they face here is simply to supplement what is happening in the major members of the eurozone, with regulatory powers.

Half a month ago an increase in Estonian prices came from energy, with electricity and natural gas costing more than 120% from a year earlier in December with high performance in cold northern temperatures.

But their problem could also ring off bells at the ECB, with the central bank in Tallinn speaking faster than lawmakers in Frankfurt about the dangers of second-hand consequences.

“Rising electricity prices mean that inflation is not going down anytime soon,” said Sulev Pert, an economist at Estonia’s largest bank. “It is bad for the economy if a temporary rise in inflation could cause companies to go up in price, causing them to change their prices and lead to higher wages.”

© 2022 Bloomberg


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