VILNIUS - Prime Minister Gediminas Kirkilas has said that the government would not draft tough anti-inflation measures since such policies could lead to an economic hard-landing. He reiterated his forecast that inflation, which recently reached double-digit territory in Lithuania, should ease in the second half of this year.
"In my opinion, Lithuania 's the government and the central bank 's has managed to maintain lower inflation levels than some other new European Union countries, particularly our neighbors," Kirkilas told Parliament.
The statement is ominous given the country's surging consumer prices and upcoming parliamentary elections, which are likely to put a hold on any unpopular budget cuts. A wave of teachers' strikes has already put pressure on the government to raise public sector wages.
Kirkilas stressed that the government's priority was growth. "Today we see a soft slowdown in economic growth. It is very important not to go too far with anti-inflation measures and not to slow growth too much, otherwise this can lead to a sudden economic downturn," he said.
The Social Democrat said that inflation was a problem for all of the European Union, and new member states in particular, since there were many "objective factors" behind it, including energy prices.
Lithuania's annual inflation rate hit an 11-year high of 11.3 percent in March, and is set to continue rising after a new round of excise taxes kicked in. With the last month result, Lithuania has overtaken Estonia in terms of annual inflation and now is in third place in the EU in terms of consumer price gains.
The Finance Ministry announced on April 3 that it has raised its forecasts for average annual inflation to 9.2 percent, citing faster-than-expected gains in global food and oil prices.
The ministry did not change its medium-term GDP growth forecasts and expects economic growth to decelerate to 5.3 percent this year and then to 4.5 percent next year before accelerating again to 5.2 percent in 2010 and 5.8 percent in 2011.
Meanwhile, the price pressure continues. On April 7 the statistics office announced that producer prices for manufactured goods at the factory gate soared at an annual rate of 21 percent in March.
In March 2007 producer prices of goods sold on the domestic market soared 17.6 percent.
Last month analysts at SEB Bankas wrote in a review that the annual inflation might persist in the first half of this year. Government's efforts to tame inflation have been pure "imitation," the bank said, and actual measures to control the growth of prices had to be taken at least a year ago.
Danske Bank wrote in a research note on April 8 that the bank's analysts "did not expect a significant ease in inflationary pressure in the coming months due to an anticipated rise in public transport costs and hikes in heating prices."
In the bank's words, "Lithuanian authorities have limited ability to control inflation as the following acceleration in consumer prices will be mostly related to one-off factors (excise duties rises and regulated prices hikes), which will drain away gradually over the coming year."