The central bank is reducing its monetary policy support for the economy because the boost to inflation given by the war that Russia launched in Ukraine means it is no longer justified. The government also has a role to play in slowing inflation.

“It is not wise to use one foot to press the brakes of monetary policy while stepping on the accelerator at the same time with the other foot”, said Governor of Eesti Pank Madis Müller today in his address to the Riigikogu presenting the annual review of the work of Eesti Pank.

The central bank is playing its part at the euro area level to manage inflation. Negative interest rates will also soon be a thing of the past in the euro area and the additional asset purchases that the central bank has used to revive the economy, or money printing as it is sometimes popularly called, are ending. The loans from the central bank to the commercial banks at very low rates are also being ended. “To curb inflation in Estonia though, it is very important that government spending not create excessive price pressures”, emphasised Mr Müller, noting that higher inflation in the Estonian economy is becoming more broadly based. The state has to make the investment needed and to cover the unexpected costs occasioned by the war in Ukraine, but the Estonian economy does not need direct support from the state, as demand being too weak is not a problem in Estonia.

Mr Müller said that the central bank is monitoring the increasing worry that the gap between the revenues and expenses in the Estonian state budget is becoming permanent. The Estonian state debt will jump over the next four years from around 20% of GDP to an estimated 30%, and only a part of that will be because of crisis spending. “One euro in ten that is spent under the state budget is not covered by revenues, and so more and more will need to be borrowed”, noted Mr Müller, pointing out that rising central bank interest rates will see the cost of servicing government debt rise as well.

Furthermore, the Estonian state currently gets a substantial part of its income from the European Union budget, and this support will be reduced in future as the standard of living improves. “We are actually able in the best case to cover only 85 cents of each euro spent by the Estonian state from our own revenues”, said Mr Müller. “This is not sustainable over the long term and it should make us cautious when we are planning additional permanent state expenditures”.

Speech by the Governor of Eesti Pank to the Riigikogu Presentation of the Annual Report of Eesti Pank for 2021

For further information:
Viljar Rääsk
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Eesti Pank
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