Responding to questions in the Riigikogu on Monday about the asset purchase programme of the euro-area central banks, Governor of Eesti Pank Ardo Hansson said that the asset purchases will make borrowing cheaper for Estonian companies and households too.

Mr Hansson explained to the Riigikogu that the central banks of the euro area are buying bonds from the market to encourage the investors selling the bonds to invest their money elsewhere. The revival in the economy provoked by this will lead inflation to climb gradually towards the common target of the euro-area central banks of keeping inflation rates below, but close to, 2% over the medium term.

At the decision of the Governing Council of the European Central Bank, the central banks of the euro area are buying some 50 billion euros of private-sector bonds each month, of which Eesti Pank’s share is around 120 million euros. They are only buying from the secondary market and generally buy sovereign bonds from their own country. As the Estonian government has not issued any bonds, Eesti Pank has decided to buy bonds of European institutions like the European Financial Stability Fund and the European Investment Bank from the secondary market.

Eesti Pank requested exceptional permission from the European Central Bank to buy bonds from Elering, a state-owned company, and has bought a total of 30 million euros of such bonds since June. Mr Hansson also noted that Elering is not getting any direct benefit from the purchases by Eesti Pank as the central bank is only allowed to buy the bonds from the secondary market.

Mr Hansson stressed in his answer that central banks can only use monetary policy to offer short-term easing to the economy, and that it cannot create long-term economic growth. “Monetary policy is no substitute for the structural reforms needed to boost competitiveness and keep state finances in order.”

He said that there is no need to issue additional bonds to fund the state budget, given the cyclical position of the Estonian economy. “The Estonian economy is currently in a position where the government should be looking to start making savings rather than to borrow to cover additional costs.”

In the longer-term, said Mr Hansson, Estonia will need to face up to various problems. “In planning our finances, we should remember that the Estonian population is ageing quite quickly, which means that there will be fewer workers and more people needing care. The subsidies from the European Union will also start to decline as the income level of the state rises. One of Estonia’s advantages has been the low level of government debt and it would not be sensible to increase that debt when financial pressures may be just around the corner,” he added.

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