The financial result of Eesti Pank last year was zero
The Supervisory Board of Eesti Pank approved the annual report of the central bank for 2022 this week. With this it confirmed the profit of Eesti Pank for the financial year of 0 euros. Eesti Pank earned 303 million euros in interest income, while interest expenses were 302 million euros and operating costs were 25 million euros. Rapidly rising interest rates meant that the central bank made a loss of 157 million euros on investments, which was largely covered by risk provisions set aside from profits from earlier years for that purpose.
Eesti Pank has been building up its general risk provision buffers since 2012. Risk provisions are the first line of defence against losses on top of the reserves held at the central bank.
Governor of Eesti Pank Madis Müller said that Eesti Pank has built up strong capital buffers and that in February 2023 the various buffers totalled over 500 million euros. In distributing the profit of the central bank, the Supervisory Board prioritises building sufficient capital buffers for the bank to carry out its tasks before distributing to the state budget.
The investment results last year were disappointing because of the sharp rise in interest rates. When interest rates rise fast, it is primarily the value of long-term bonds that suffers, and a large part of the Eesti Pank investment portfolio is invested in exactly that sort of bond. Last year was extraordinarily difficult for bond investors in historical terms, especially as it has been rare in the past half-century for the prices of bonds from advanced economies to fall so much (see accompanying Figure).
The main priority for Eesti Pank as a central bank of the euro area is to maintain price stability. The decisions by the European Central Bank to raise interest rates have been taken with the target of bringing inflation in the euro area, which still remains too high, back under control. Earning profit from the investment portfolio or other activities is a secondary issue for central banks.
Madis Müller also gave the Board the regular review of the state of the economy and the financial sector in the euro area. Economist Taavi Raudsaar presented the review the financing of the economy to the Supervisory Board.
The next meeting of the Eesti Pank Supervisory Board will be on 25 April.
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