Price decline continues to intensify in Latvia

EMEA Daily

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Review

Inflation in Estonia remains very subdued. Read our Flash Comment.
Romanian industrial production contracted 5.9% y/y in August compared to July’s 6.9% y/y fall. Retail sales for August remained deep in the red contracting 12.1% y/y, albeit slower compared to -13.8% y/y in July.
Political jitters have begun to take centre stage also in Poland after Polish Prime Minister Donald Tusk reshuffled his government over the gambling bill scandal. On Wednesday Tusk sacked the head of the Anti-Corruption Office Mariusz Kaminski and accepted the resignation of three ministers in his government: Deputy Prime Minister Grzegorz Schetyna, Justice Minister Andrzej Czuma and Deputy Economy Minister Adam Szejnfeld. The prime minister will name a new cabinet next week.

Preview

We expect Lithuanian CPI to pick up somewhat in September to 2.7% y/y. This will be due to higher VAT and excise duties on tobacco products; higher inflation should only be temporary with the downward trend in CPI continuing resuming later.
Price decline continues to intensify in Latvia. Latvian CPI in September is expected to decelerate to 0.4% y/y from 1.8% y/y in August. We expected to see annual deflation as early as October and average annual inflation of around 3.6% for the whole year.

Trading update

Yesterday saw government bond auctions in Lithuania and Latvia. The Republic of Lithuania paper maturing Jan 2015 saw strong demand with a bid to cover ratio above 3 and was launched at US Treasuries +462.5bp. Meanwhile, the auctions in Latvia, where three short-term papers were offered, were less successful. Total bid to cover was around 1/3 and one of the papers saw no bids at all. In total only LVL 2.04m was placed of a total supply of LVL 24m.
Most EMEA FX-markets started the session positively driven by risk appetite and higher equity markets; nonetheless the mood turned sour during the day and EMEA FX-markets came under strong selling pressure – with the exception of Russian roubles. We judge that the escalating situation in Latvia and political jitters in Poland and Romania are key factors behind the weakening currencies.
Market rates inched higher during the trading session as currencies depreciated across the region. The only exception were Czech rates, which were slightly lower.

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Published On Thu, Oct 8 2009, 05:40 GMT

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