Inflation in Estonia has lost momentum says Ülo Kaasik



“Inflation has not notably risen in Estonia since last August, and there are grounds to believe that it will already be in single digits in the second half of this year”, said Deputy Governor of Eesti Pank Ülo Kaasik. He observed that the real estate market has calmed down sensibly.

“Food prices will continue to rise, but energy prices and the price of oil and gas have come down substantially. The Eesti Pank forecast expects inflation to come down and be close to a more normal level in the second half of this year”, he told the annual conference of the Estonian Economic Association.

The European Central Bank has raised key interest rates in the euro area by 2.5 percentage points since last July in order to slow inflation, which rose last year throughout the euro area. The Deputy Governor of Eesti Pank noted that monetary policy had reacted firmly, and that the European Central Bank has said that it will continue to raise interest rates until inflation in the euro area is convincingly approaching its target of 2%. Raising interest rates obviously increases costs for borrowers, but helps prevent inflation becoming entrenched for a long time. “There are no good ways to tackle inflation that has become too high, so we must choose between bad and worse, and inflation staying high for too long would be the most harmful outcome for people and for the economy as a whole”, said Mr Kaasik.

Falling energy prices and access to alternatives to Russian gas have given greater confidence to businesses in the euro area. “This gives us hope that the euro area as a whole will this year manage to avoid the recession that was feared”, he continued. He said of the Estonian economy that difficult times would continue, but that the outlook was better for the second half of the year. Government spending is supporting demand in the domestic market, and the profits of companies have continued to grow despite their higher costs. The impact of Russia’s military aggression in Ukraine on Estonia’s economy has so far mainly been felt through high inflation and through a sharp drop in imports and payments. Exports have largely exceeded the initial forecast from Eesti Pank though. “The impact on exports of the war in Ukraine is expected to be felt more strongly this year”, said Mr Kaasik, noting that it would take time for the full impact of the sanctions imposed on Russia to be felt.

While the war continues, there remains a lot of uncertainty about the outlook and forecast for the economy. This is also true for the labour market in Estonia, where Eesti Pank sees higher unemployment being mainly the consequence of Ukrainian refugees entering the labour market. “We are not expecting any large wave of redundancies or massive job cuts”, said Mr Kaasik, though he noted that companies are less keen to hire new employees at present. The number of people employed in the Estonian economy is currently close to its record level. “It is hard to forecast how the refugees will affect the market while the war continues”, he added.

He said that events in the real estate market in Estonia cannot be compared with what happened in the market during the pandemic or in the first half of last year. At that time the market was showing some signs of frothiness that could not be sustainable in the longer term. “The current amount of construction and the number of transactions should really be compared with the state of the market before the pandemic”, he said, adding that the economy as a whole will benefit if the real estate market calms down. Businesses also find it easier to operate when there is more stability.

The large budget deficit is a notable feature of the Estonian state finances. “When calculating how to cover the budget deficit, it must be remembered that it has become more expensive to borrow and that costs are increasing”, said Mr Kaasik, explaining that if the debt level were to rise to say 35-40% of GDP, then interest payments could account for 3-4% of total government spending in a decade. “Additional spending also requires additional revenues”, he stated.

The 2023 annual conference of the Estonian Economic Association was held in Rakvere on 26 and 27 January.

Photos: Andres Vaher, Tartu Ülikool

Additional information:
Hanna Jürgenson
Eesti Pank
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