ECB’s ‘Fits-All’ Rate Policy May Be Wrong Size for Baltics

For some euro-region nations, super-loose monetary policy may have outstayed its welcome.

Inflation in the three Baltic countries is the currency bloc’s fastest and more than double the average rate. Lithuania’s reached the highest in six years this month. Meanwhile, economic growth is also surging and – while not currently overheating – Estonia, Latvia and Lithuania are uneasily recalling the boom-bust cycle that sank them back in 2008.

At play are the European Central Bank’s record-low interest rates and its asset purchase program, aimed at averting the risks of entrenched deflation and bringing price growth to just under 2 percent across the region. But divergent economic fortunes within the euro area mean those policies are far from appropriate for all nations.

“There’s too much stimulus,” Martins Kazaks, chief economist at Swedbank AB’s Latvian unit, said by phone. “At the moment there are some countries that need it decreased and some still need it. The problem is that if you would start raising interest rates, you would create a shock in some parts of southern Europe.”

It’s not just economists fretting. The European Union’s bi-annual Eurobarometer survey showed inflation was Lithuanians’ biggest fear. At 54 percent, the proportion of citizens worried about rising prices topped those anxious about terrorism and immigration.

October’s ECB meeting, at which President Mario Draghi may announce the next step on the slow path toward policy normalization, can’t come soon enough for some.
Source: Bloomberg