Monetary policy

Estonia joined the euro area at the beginning of 2011. The Eurosystem, which is made up of the central banks of the euro area countries and the European Central Bank in Frankfurt, is responsible for implementing monetary policy in the euro area. As a member of the Eurosystem, Eesti Pank participates in setting its monetary policy, taking the decisions needed for it, and implementing those decisions.

The primary objective of the Eurosystem monetary policy is to maintain price stability in the euro area[1]. The European Central Bank defines price stability in the euro area as yearly growth of 2% in the harmonised index of consumer prices over the medium term.

The Eurosystem supports the general economic policy of the European Union as far as this does not threaten price stability, and helps to achieve its common aims[2].

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

Monetary policy can affect activity in the non-financial economy in the shorter term, and so the ECB should generally avoid letting economic growth and employment move too far from balance as long as this is in line with its primary objective of maintaining price stability. The central bank affects the price of borrowed money in the economy by setting interest rates higher or lower. Cheap loans give a boost to growth in the economy, while a higher cost of borrowing slows growth and so also brings down inflation.


[1] This is set out in article 127 section 1 of the Treaty on the Functioning of the European Union.
[2] The aims of the European Union are set out in Article 3 of the Treaty on European Union.