Riga  - Annual inflation in Latvia dipped from 9.6 per cent in February to 8.2 per cent in March, according to figures released Wednesday by the Latvian national statistics office.

Despite the drop Latvia retains the highest inflation rate in the European Union, hampering efforts by the government of Valdis Dombrovskis to balance the books in the recession-hit Baltic state where GDP is expected to contract by 13 per cent in 2009.

Data also released Wednesday in neighbouring Lithuania, which like Latvia is seeing savage cuts in public spending as part of its own austerity programme, showed that inflation fell from 8.7 per cent year-on-year in February to 7.7 per cent in March.

Danske Bank's senior Baltic analyst, Violeta Klyviene, said the fall was "as broadly expected," though the impact of rises in duty on tobacco and higher public transport fares was less than anticipated.

"GDP contraction could reach an average of 10 per cent this year, especially taking into account expected fiscal tightening which is in the pipeline," Klyviene said.

Inflation figures for both Latvia and Lithuania remain higher than in the third Baltic state, Estonia.

Figures released on Tuesday revealed Estonian annual inflation now stands at 2 per cent.

Most analysts agree that all three Baltic states will find deflation more of a problem than inflation by the end of 2009 as consumer demand evaporates and unemployment rises sharply.(dpa)