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
- Price StabilityPrice stability means low but stable inflation. This helps people and companies make economically sound decisions in their plans for the future and their salary requests, creating the right conditions for economic growth.
- The functioning of monetary policyOnly the central bank can create and issue currency. By changing the price of the money borrowed by the commercial banks and the amounts they can take, the central bank can affect the conditions for loans taken by people and companies. In this way the central bank can affect inflation.
- Transmission mechanismWhen the central bank changes the prices and amounts of money the commercial banks can borrow, the effect is passed on into the economy as a whole, and particularly into prices. The monetary policy transmission mechanism is the various channels by which the central bank’s actions are passed into the economy.
- Operational frameworkThe central banks of the euro area act to meet the goals of the single euro-area monetary policy in a decentralised way, doing so within the agreed solutions and principles that together are called the operational framework.
- Central bank reservesFor people to have faith in a currency, the value and stability of that currency must be backed up, and this is done with the reserves of the central banks. Currency reserves have a key role in maintaining confidence in the economy and in supporting the stability of the financial system.
- Estonian Economy and Monetary PolicyEstonian Economy and Monetary Policy gives a comprehensive overview of the economy and an economic forecast. It is published four times a year.
- Estonian Competitiveness ReportThe Estonian Competitiveness Report is published once a year. Competitiveness is analysed through Estonian export capacity (relative productivity growth, changes in export indicators and similar) and relative price and cost competitiveness indicators.
- Labour Market ReviewThe Labour Market Review discusses the most important trends in the Estonian labour market, labour supply and demand, institutional developments of the labour market, and other related issues. The review is published twice a year.