Governor of the Bank of Estonia to the Riigikogu: Estonian people can handle the price rise

Müller said that if you tried to sum up the past year very briefly from the central bank’s point of view, it could be said that the decade of the extremely mild monetary policy of central banks was over. “It came to a more abrupt end than we as a central bank were able to predict. And besides, the threat situation that has changed due to Russia’s attack against Ukraine has also forced Eesti Pank to think of readiness even in the darkest scenarios. In particular I must speak about inflation today because it is the main area of responsibility of the central bank,” he said.

Governor of Eesti Pank noted that in Europe the price rise could be felt particularly harshly because our dependency on Russian energy carriers had been significant. “Last October, inflation in the euro area jumped to 10.6 percent. Such an accelerated price rise has not been seen during the whole time the euro has been in circulation, and it is far from the two per cent level which is the goal of the European Central Bank,” he explained. He added that we had been in an even worse situation in Estonia. “The last time that we experienced such a rapid price rise was in in mid-1990s.”

Müller explained that the main instrument of a central bank to manage the price rise was to raise interest rates. When interest rates are increased, loan money becomes more expensive as a result of which less goods and services are bought and the price pressure on economy eases off. However, if economy is struggling and needs a boost, the central bank can lower interest rates and thereby make loan money more available again. “Last summer we began to raise interest rates in the European Central Bank again after a ten-year long break. This year we have raised interest rates for as many as seven times, by a total of 3.75 percentage points which is an extremely fast pace,” Müller noted. He added that further purchase of bonds into the balance sheet of the European Central Bank had also been stopped. “The purchase of bonds, which has been dubbed ‘money printing’ in popular jargon, helped keep the price of money low in order to boost the economy. In the current circumstances of a clearly too rapid price rise it is no longer appropriate for the central bank to stimulate the economy in such a manner.

Müller confirmed that the price rise had already begun to slow down in the euro area and that was in particular due to energy becoming cheaper, but the price rise had not yet begun to drop in the economy more generally. “One factor here is definitely the unusually strong state of the labour market, considering the complicated economic situation. This has among other things contributed to the persistence of sufficiently strong demand in economy and has given businesses an opportunity to raise prices while maintaining their profit. Thus, we will probably have to continue to raise interest rates at the European Central Bank.”

How are our businesses and people coping with the steep rise in interest rates? “In Estonia we can see that businesses have so far coped well with the higher interest payments. As consumers had a lot of money in their hands, businesses could substantially increase their sales revenue and profit until very recently. The fact that unemployment has stayed low has in turn helped people to cope. Job loss is the greatest risk for households in coping with loan payments. Savings from the pandemic and the money withdrawn from pension pillars have also supported people. Therefore, we are not seeing any major solvency problems right now,” Müller said.

Among other things, the Governor of the Bank of Estonia highlighted in his report that the inflation in Estonia that had broken records in the euro area in the past year had been showing a tendency to slow down since last August. “We predict that, by the middle of this year, inflation will stop at ten per cent in Estonia and will be at the level of five per cent towards the end of this year,” he noted.

He also drew attention to the fact that public spending should not further boost the already rapid price rise and steering the state budget towards balance was complicated but necessary.

During the debate, Igor Taro (Estonia 200), Lauri Laats (Centre Party), Anti Poolamets (Estonian Conservative People’s Party) and Andres Sutt (Reform Party) took the floor on behalf of their factions.

Verbatim record of the sitting (in Estonian)

The video recording of the sitting will be available to watch later on the Riigikogu YouTube channel. (Please note that the recording will be uploaded with a delay.)

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Maris Meiessaar
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Link uudisele: Governor of the Bank of Estonia to the Riigikogu: Estonian people can handle the price rise

Source: Parliament of Estonia