Inflation has by now fallen enough across the whole euro area to allow the European Central Bank to cut interest rates substantially, but high inflation in Estonia and its impact on the purchasing power of people in the country remains a concern said Governor of Eesti Pank Madis Müller at the Riigikogu.

The central bank governor was presenting the Eesti Pank annual report 2024 to the members of the Riigikogu, and he gave them review of the main developments in the economy and the financial sector.

One of the main changes that the central bank saw last year was the retreat of inflation in the euro area, which allowed the European Central Bank to start cutting its interest rates from the record levels they had reached when they were raised rapidly. This has made it cheaper to borrow, which has made conditions for investment more favourable for companies and households, and lowered costs for borrowers. The key interest rate for borrowers in Estonia is the six-month Euribor, which follows the movements in the European Central Bank’s interest rates and peaked at above 4%, but which has now come down by more than half as the central bank rates have been cut. This will help the economy to recover.

Inflation has however remained high in Estonia at the same time. Eesti Pank forecasts that it will be 5-6% in Estonia this year, about a third of which will come from tax rises. The remainder mainly comes from growth in wages and from prices for food rising, which they have done because commodities prices have risen on global markets. “High inflation and its impact on the purchasing power of people in the country remains a concern”, observed Mr Müller, noting that the purchasing power of the average wage will not increase this year. “It may be expected to do so from next year, when the tax-free threshold is extended to all taxpayers and as inflation falls”, he added. The impact of tax rises will fade, and inflation may be expected to fall to close to 3% in the new year.

Orderly state finances are the cornerstone for the economy, he emphasised, observing that this means more than having a fiscal deficit that is lower than planned for one-off or temporary reasons. “There should be a long-term plan for the needs and possibilities of the state that is based on sustainable fiscal rules and that gives confidence to local businesses and foreign investors”, he said. The steps taken by the government to reduce the tax take and increase state spending will give the economy a lift next year, but the price of using fiscal policy to revive the economy like this is however that the government debt grows and so will its interest expenses. All taxpayers will then have to contribute to pay that debt back in the coming years. “Permanently higher spending by the state requires there to be a larger and more stable revenue base”, he said.

Mr Müller explained that the deterioration in European security affected how Eesti Pank carried out its core tasks in 2024. “For the central bank this primarily means that we must invest more in securing our activities against any crisis and ensuring that payment services and the circulation of cash are fully resilient”, he said. The large-scale electricity blackout in Spain and Portugal in the spring was a reminder of how important it is to be ready for any crisis, as food and other essentials could only be bought for cash. “Digital payments are convenient, but we must be ready and able to cope if they stop working”, he observed.

Mr Müller discussed the need to adapt to changes in the global economic environment and highlighted how experts from Eesti Pank had contributed to the expert group on competitiveness set up in 2023 by the Economic Affairs Committee of the Riigikogu. The results of this work have been discussed in the Riigikogu as a question of national importance. “We believe it is important that this work continue in the years ahead”, said Mr Müller. Increasing attention is also being paid in Europe and in Estonia to ensuring that enterprise is not drowned by excess regulation. The Governor of Eesti Pank participates in one of the high-level working groups at the European Central Bank dealing with this.

Eesti Pank returned to profit in 2024, which allowed it to continue its programme of transferring a quarter of its annual profit to the state budget. It also continued to strengthen its capital buffers.

The speech by the Governor of Eesti Pank to the Riigikogu can be read in full in Estonian on the Eesti Pank website.

Photographs from the event can be found on the website of the Riigikogu

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 5692 0930
Press enquiries: [email protected]