The Riigikogu heard the annual report of the Governor of the Bank of Estonia
Governor of the Bank of Estonia Madis Müller gave the Riigikogu an overview of the key developments in economy and the financial sector in 2024, and of the difficulties the increasingly uncertain external environment was causing to the economy.
Müller said that he wished to single out the following issues from the past year. “Firstly, the increase in prices in the euro area slowed down, which allowed the European Central Bank to begin lowering interest rates after a rapid cycle of increase. Secondly, the Estonian economy began to show signs of recovery. And thirdly, the security situation in Europe deteriorated, requiring improvements in the crisis resilience of services that are critical to the society. For the Central Bank, this primarily means that we have to make additional investments to improve the crisis resilience of our operations and to ensure the continuity of payment services and cash circulation,” he explained.
The Governor of the Bank of Estonia said that, as regards the most important issue from the Bank’s perspective – the price stability, in June 2024 the Governing Council of the European Central Bank finally reached sufficient confidence that the pace of price increase in the euro area had slowed down enough and was on the right track towards the two-percent target. Müller explained that this allowed the Central Bank to start gradually reducing its interest rates. “As interest rates decrease, borrowing costs become lower, leaving borrowers with more disposable funds and creating more favourable investment conditions for businesses. By today, we have reduced euro area interest rates eight times, and the Central Bank’s main interest rate has thus fallen from its four-percent peak to half that level. For Estonian borrowers, the important interest rate is the 6-month Euribor, which also follows the movement of the European Central Bank’s interest rates. The 6-month Euribor also temporarily exceeded the four-percent mark. However, due to the Central Bank’s actions, it has fallen to nearly two percent, or also down by half”, he explained.
According to Müller, last year the overall economic environment was still influenced by Russia’s war of aggression in Ukraine. A new wave of uncertainty arose due to the sharply changed U.S. trade policy following the presidential elections. With regard to the Estonian economy, Müller highlighted the indicators demonstrating an economic recovery. “For instance, last year saw increases in the volume of retail sales, industrial production, exports, and several other key economic indicators. One can say that the economy is recovering, though it is doing so with some difficulty,” he said.
“The rapid price growth and its impact on people’s purchasing power remain a cause for concern,” Müller noted, explaining that while the rise in the cost of living slowed to around 3.5 percent last year, a five to six percent price increase is expected in Estonia this year. About one-third of it is due to tax increases, while the rest is largely related to the increase in salary costs and to higher food prices, as the prices of raw food materials have also increased on the global market. “Since the expected rise in average salaries barely exceeds the increase in the consumer price index, and income tax rate also rose at the beginning of the year, people’s actual income will not grow this year. This is expected to take place next year, when the tax allowance will be extended to all taxpayers and the pace of price increase slows down.”
According to Müller, in 2024, the Bank of Estonia fulfilled all of its core tasks, which include ensuring price stability and implementing monetary policy in the euro area, managing the foreign exchange reserves of the Estonian state, maintaining the functioning of cash circulation and payment systems, and preserving financial stability in Estonia. In addition, the Bank of Estonia compiles ‑economic and financial statistics, prepares economic analyses, participates in international cooperation, and advises the Government on fiscal‑ and economic policy matters.
Mart Võrklaev from the Reform Party Group, Lauri Laats from the Centre Party Group, Toomas Uibo from Estonia 200, and Riina Sikkut from the Social Democratic Party Group took the floor during the debate.
Verbatim record of the sitting (in Estonian)
Photos (Erik Peinar/ Chancellery of the Riigikogu)
Video recording will be available on the Riigikogu YouTube channel.
Riigikogu Press Service
Maris Meiessaar
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