* Central bank: Estonia to meet euro entry criteria in 2009
* Sees euro zone entry by Jan 2011 at latest
* Economy could shrink more than baseline scenario
By Sakari Suoninen
FRANKFURT, March 20 (Reuters) - Estonia is on track to meet its target of joining the euro zone by January 2011 at the latest, as inflationary pressures have eased and the government is committed to keeping the public deficit within the 3 percent of gross domestic product limit, the central bank head said.
"As we are looking, it is quite clear we will fulfil all the criteria at the end of this year, if no new surprises are coming," Bank of Estonia Governor Andres Lipstok told Reuters in an interview conducted on Thursday, but slated for publication on Friday.
"I can confirm we are ready to join as soon as possible, and the latest date is January 1, 2011."
Estonia has been a member of ERM2, the euro zone ante-chamber, since 2004 and had originally hoped to join in 2007, but failed to reduce its high inflation in time.
"It is our obligation when we fulfil the criteria, we should start the procedure," Deputy Governor Marten Ross said.
"Maybe it is the October or November or December (inflation) number that is finally showing that we fulfil the criterion."
The Maastricht criteria states inflation cannot be higher than 1.5 percent above the three best performers in the 27-country European Union.
Estonian inflation fell to 3.4 percent year-on-year in February, the slowest annual rate since June 2005.
The central bank officials said keeping the deficit in check has become a bigger problem than rising prices, but this should not keep the country from joining the euro zone.
"Fortunately the budget deficit depends on government activities, and the government has declared that if there is need, they are ready to cut the budget again," the governor said.
On Thursday, business daily Aripaev reported EU Economic and Monetary Affairs Commissioner Joaquin Almunia told Estonian Prime Minister Andrus Ansip at a meeting in Brussels that the country should stick to January 2011 as its euro entry target.
Ansip recently said if Estonia met the criteria for joining the euro zone in late 2009, it would seek to join from July 1, 2010.
Despite the impact of the financial crisis on economies and the fiscal burden of stimulus packages, the Bank of Estonia sees no reason to loosen the euro entry criteria.
"We support that new members should fulfil all the Maastricht criteria and we would like to join a strong euro zone, not some flexible euro area," Lipstok said.
SHRINKING ECONOMY
The likelihood of the Estonian economy contracting this year more than the central bank's baseline scenario of 5.5 percent has risen as demand in key trading partners is falling, the country's central bank head said.
"If our partners will be worse off than we think today, 5.5 percent (GDP reduction) will be optimistic and the risk scenario would be a little bit closer than this 5.5 then," Lipstok said.
"The probability of the risk scenario is of course very high already," Ross said, but added the central bank would not revise the forecast range of 5.5 to 9 percent GDP fall until the next forecasting round.
They said the country had adjusted from the boom time, and the problems it was facing now were due to the global economic crisis, not domestic issues.
They said that while private sector debt levels were expected to fall in 2009, this was the result of lower demand rather than banks not lending.
"Most likely we will see that debt level will be lower, there will be negative loan growth this year and maybe next year, but this is not due to supply side constraint," Lipstok said.
When asked whether there was any chance of Estonia dropping its currency peg, the governor and deputy governor both said: "No."
Estonia's kroon currency is pegged at 15.6466 to the euro.
Devaluation to gain competitive advantage would not bring lasting benefits. "Cheating in a small economy with currency does not really help you in the long term," Ross said. (Reporting by Sakari Suoninen; Editing by Victoria Main)