Müller: Estonian economy needs to cool down

President of the Bank of Estonia Madis Müller.A photo: Raul Mee

While war-enhanced price increases this year could eat into entrepreneurs’ profits, Estonia has entered a period of uncertainty with an economy operating at full capacity, so measures to cool it down should be considered, says Eesti Pank President Madis Müller.

Today, the Bank of Estonia published its economic forecast up to 2024. In the long term and from a macroeconomic point of view, the government may even be optimistic about the situation, but things are not so rosy for entrepreneurs and private consumers. The sharp rise in prices is likely to worsen this year and remain at a high level in the coming years.

The only way to curb rising inflation is to cool the economy. That is why the President of the Bank of Estonia does not consider it right to reduce excise taxes on fuel to contain prices.

“When considering support measures, the government should carefully assess whether offsetting price increases through chosen policy levers would increase pressure on prices through (growth in) consumption. We recommend that the government target future support measures very precisely so that aid reaches those who really need it,” Muller said.

Eesti Pank forecast:

Ülo Kaasik, Deputy President of the Bank of Estonia, added that if politicians do decide to reduce the excise tax on fuel, this should not aggravate the already 2% state budget deficit: “The decrease in excise revenue must necessarily be covered by other means.”

“Printing money” is coming to an end, and loans are becoming more expensive

Madis Müller, who represents the Bank of Estonia on the Council of the European Central Bank, believes that monetary policy in the euro area has also taken a course of cooling.

“We have already made a decision in the board of the Central Bank that this month the bond purchase program, which was launched in the spring of 2020 to support the economy during the corona crisis, will be completed,” he said, adding that other asset purchase programs that softened the consequences of the pandemic will end no later than the third quarter of this year.

After that, the European Central Bank will begin to raise key interest rates. “People need to be prepared for higher interest rates,” Muller said, noting that loans will no doubt become somewhat more expensive in the future.

As Delovye Vedomosti wrote, the 12-month Euribor is approaching zero. Economists estimate that Euribor will reach a surplus in the second half of the year.

The war significantly affected imports

The disappearance of the export markets of Russia, Ukraine and Belarus will not cause a wave of unemployment, however, according to Kaasik, it will still rise by about 0.5% to 1.5%. “This means that about 10,000 people could lose their jobs,” the economist admits.

Both Kaasik and Muller advised the government to consider finding new export markets for companies operating in these Eastern European markets.

Increasing the unemployment rate, however, will not solve the local problem of the Estonian economy, ie. labor shortage. Muller notes that 10,000 refugees who arrived in Estonia from Ukraine can partially alleviate the situation. “However, we cannot predict how well they will adapt to the labor market,” he said. The President of the Bank of Estonia believes that at the moment the government should focus on covering the additional costs caused by refugees from Ukraine.

Additional budget – only for the essentials

The budget deficit will be exacerbated by extraordinarily large investments in security, Müller notes: “The supplementary budget that is currently being discussed by the government should focus only on the most significant extra spending related to refugees and security.”

Eesti Pank predicts that times of instability await us. It is necessary to prepare for them – first of all, by limiting consumption at a reasonable pace and collecting reserves to compensate for rising prices.

“The prospects for both the Estonian economy and the entire Eurozone today depend on big politics and sanctions. /… / Overall, however, current indications are that we are not in danger of a general economic downturn, which could be caused by low demand. This means that the government no longer needs to support consumption and the economy as a whole,” Muller concluded.

Source: https://www.dv.ee/ by www.dv.ee.

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