Estonia joined the euro area at the beginning of 2011. In the euro area, the Eurosystem is responsible for the implementation of the single monetary policy. The Eurosystem consists of national central banks (NCBs) in the euro area and the European Central Bank (ECB) in Frankfurt. As a Eurosystem member, Eesti Pank participates in the formulation of euro-area's single monetary policy and related decision-making and implementation.

To maintain price stability is the primary objective of the Eurosystem. This has been laid down in Article 127(1) of the Treaty on the Functioning of the European Union. Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area close to but below 2%. Price stability is to be maintained over the medium term.

Without prejudice to price stability, the Eurosystem will also support the general economic policies in the European Union to contribute to the achievement of common goals. The goals are set out in Article 3 of the Treaty on European Union and they include, among other things, high employment, competitiveness of the economy and sustainable growth.

The Treaty on the Functioning of the European Union establishes a clear hierarchy of objectives for the Eurosystem. It assigns overriding importance to price stability. Ensuring price stability is the most important contribution that monetary policy can make to achieve a favourable economic environment and a high level of employment.

Given that monetary policy can affect real activity in the shorter term, the ECB typically should avoid generating excessive fluctuations in output and employment if this is in line with the pursuit of its primary objective, price stability.

Monetary policy