On 25 April 2000 the Board of Eesti Pank approved the plan for the operational framework reform of monetary policy. The approval of the reform plan means technical changes in the commercial banks' reserve requirement system, the most important of which is making it possible for the banks to partially meet the reserve requirement by using foreign assets. At the same time, the approval denotes the beginning of the harmonisation of the Estonian monetary policy framework with that of the Euro zone. The planned steps can be seen as a continuation of both the liquidity system reforms of 1996 and the decision to remunerate the reserves held in the central bank in 1999.

The Estonian financial markets have seen rapid development in recent years. The changes that have taken place in the markets and in the liquidity system, the challenge to the monetary system posed by turbulent events and times, and the concentration and ongoing integration of the banking market with international markets have transformed the environment to such an extent that the existing operational framework has to be revised and modernised. At the same time, Estonia has to start harmonising its monetary policy framework with the Euro system. Hence - the need for reforms.

Today, nearly 4 years have passed since the last extensive reforms of the monetary policy framework. Since the second half of 1996 the commercial banks' reserve requirement had to be met on an average monthly basis. In 1996 a standing deposit facility for banks was introduced and the margin between the purchase and sale rates of the Estonian kroon and German mark transactions between the central bank and commercial banks was abolished.

No abrupt changes are to be expected. When planning the reforms the standpoint of the European Central Bank - that prior to accession to the European Union, as well as the Economic and Monetary Union (EMU), a plurality of exchange rate arrangements is acceptable for candidate countries - has been taken into account. Also, the idea of the currency board principle as an alternative within the ERMII can be accepted is being supported by the European Central Bank. Therefore, the monetary policy framework based on the currency board principle remains generally unchanged in the medium term perspective. Eesti Pank is firmly convinced that the currency board principle is the best strategy while approaching the EMU.

The operational framework reform of monetary policy has two objectives. In the short term: to review the monetary policy framework with the aim of guaranteeing the smooth operation of the fixed exchange rate in the currency board regime and reduce market distortions without lowering liquidity buffers. In the longer term: to join the operational framework with the Euro system. Since the exact date of accession to the European Union is not known, the reform plans for the operational framework only deal with the pre-accession period. This period is divided into two stages - up to 1 July 2001 and from that point on to the accession to the Euro system.

The first stage of the reform begins with the harmonisation of the reserve requirement system and additional liquidity requirement while maintaining the liquidity buffers at the present level. Also, as of 20 May 2000 the auctions of Eesti Pank CDs will be no longer held. Prior to 1 January 2001 the full implementation of the reserve requirement system reform, the reserve requirement base, and the list of assets eligible for meeting the reserve requirement, including cash in vaults, will be specified.

By 1 July 2001 commercial banks will be allowed to meet up to 50% of the reserve requirement with highly-rated liquid foreign assets. The aim of the first stage of the reform is to split the reserve requirement system into two. A lowering of the reserve requirement to be held in kroon deposits with Eesti Pank will be introduced in two stages during one year and be completed by no later than 1 July 2001. Simultaneously, and to the same extent, the reserve requirement to be met in foreign assets will be raised. The monthly average reserve requirement calculation remains unchanged. During the first stage the reserve requirement is to be remunerated according to the present system.

The second stage of the reform involves the development of the operational framework of the monetary policy towards an increasingly full convergence with that of the Economic and Monetary Union in the medium term. Also, during the second stage the reserve requirement system will be united with the Euro system and intra-day liquidity instruments will be introduced. The second stage will conclude with the accession to the EMU, after which active monetary policy instruments, inter alia open market operations, will be introduced.

Public Relations Department