Tallinn - There was mixed news on the Estonian economy Friday with official statistics showing that inflation is falling, while a ratings agency downgraded the Baltic nation's outlook.

According to data released by Statistics Estonia, the percentage change of the consumer price index (CPI) in October 2008 was 9.8 per cent year-on-year, down from 10.5 per cent in September.

Commenting on the drop, Danske Bank analyst Violeta Klyviene said: "We expect further easing of inflationary pressure as growth will fall significantly below trend over the next couple of years. On the other hand, as prices of energy resources remain on the upside, the process may not be very quick."

Danske Bank is forecasting average annual inflation for 2008 to finish between 10.4 and 11 per cent, falling to 7.5 per cent in 2009 and 5.8 per cent in 2010.

Less welcome was news that ratings agency Moody's had decided to downgrade its outlook on Estonia's sovereign rating to "negative" from "stable" with the rating itself remaining at A1.

"Moody's decision reflects the negative attitudes prevailing in the global market, including towards the Baltic States," said Andres Sutt, deputy governor of the Estonian central bank, Eesti Pank.

"The rating agency's assessment of the risks to the Estonian economy makes the adoption of the euro even more important," Sutt said.

Estonia originally hoped to adopt the euro as its currency at the beginning of 2008, but runaway inflation stoped that happening. However, it remains the stated policy of the government and the central bank to replace the Estonian kroon with the euro at the earliest opportunity. (dpa)