Bank of Estonia chief: ECB pandemic cash injections may end in spring

Madis Müller
Madis Müller Source: Ken Mürk/ERR

The large injections of money launched by the European Central Bank (ECB) last spring to bolster the economy at the start of the pandemic may already end in the spring, writes Bank of Estonia (Eesti Pank) governor and ECB governing council member Madis Müller.

Müller also writes that a key question facing the eurozone is whether current inflation will accelerate wage growth, or lead to other factors which will lead to an inflation rate in excess of 2 percent over the longer term, in his piece, published originally on the Bank of Estonia blog, as follows.

Economies in the eurozone on the whole are continuing on the route of strong recovery.

However, it is also clear that supply chain problems, plus high energy prices, will not only see prices continuing to rise rapidly in the near term, but this may also hamper somewhat the recovery of the eurozone's economy from the coronavirus crisis. 

The question is, how many of the factors currently behind the rapid rise in prices in the eurozone will become permanent features?

We can all perceive problems in supply chains, via the rising prices for a number of goods and in the longer delivery times, but this has affected particularly directly manufacturing companies, many of which have therefore not been able to become fully operational as a result.

At the same time, consumers are getting more confident in making larger purchases and, from employees' point of view, the labor market situation has clearly improved. 

The growing proportion of vaccinated populations across Europe, and the related opportunity to ease various restrictions on the spread of coronavirus have contributed to boosted confidence.

Interest rates governments are lending money at have risen somewhat over the past month, but in general it could be argued that lending conditions remain very favorable to all borrowers. 

This is especially the case when using real interest rates as a yardstick, which also takes into account the effects of accelerated price increases.

For the ECB, the primary criteria for making decisions affecting the price of credit are the pace of inflation, and an assessment of whether inflation is steadily approaching 2 percent across the eurozone as a whole. 

This is the level which is considered to be most conducive to long-term economic development, and therefore a target for price increases in the eurozone for central banks as well.

The rise in consumer prices in the eurozone reached 3.4 per cent in September, and is likely to accelerate until the end of the year. 

Three main factors have pushed up prices sharply: The sharp rise in energy prices, the failure of supply chains to recover from the crisis and the uneven opening up of economies, as well as last year's low reference point, which exerts a statistical effect on inflation.

The key question in the eurozone is whether inflation will accelerate wage growth, or instead trigger other factors which will lead to inflation over 2 percent, over the longer term. 

If this were to happen, naturally the central bank would not be able to continue its policy of large bond purchases and negative interest rates for much longer. 

What transpires in the next few months is likely to provide more and more clarity in this regard.

With all this in mind, we did not alter any of the decisions from the ECB's governing council this week which affect the price of credit. 

However, based on what we know now, I would venture to state that the large injections of money launched by the ECB to support the economy at the beginning of the pandemic last spring (officially known as the pandemic contingency plan) might end next spring.

While I have generally been able to say that Estonia's developments broadly reflect what is happening in the European economy, this is unfortunately not the case at present. 

Just as we are clearly at a disadvantage compared with the European average in terms of vaccination against the coronavirus, so too are we also unable to talk about easing restrictions.

Low vaccination rates in Estonia endangers the lives of many people, and generally makes access to treatment worse. 

In addition, public health deterioration will, of course, also affect the well-being of the tourism and leisure businesses.

However, as in the rest of Europe, and for the same reasons, our rate of inflation in Estonia has grown very rapidly, reaching 6.6 percent in September.

There are several reasons for the faster rise in prices than in the rest of the eurozone. In particular, energy costs make up a larger share of the basket of consumption of the Estonian populace. 

Furthermore, price changes reach consumers faster in Estonia, meaning the increase in the market trading price of electricity is reflected much faster in Estonians' domestic electricity bills.

The third reason is that the Estonian economy has recovered faster from the crisis than the eurozone average, while the rapid economic growth has been accompanied by a faster rise in prices. 

The rate of inflation will also be affected by the average price level, which is still lower than elsewhere in the eurozone.

More concrete decisions on how quickly the ECB might be able to ease its support for bond markets are expected at the next governing council meeting, in mid-December.

Thee original blogpost (in Estonian) is here.

Editor: Andrew Whyte

Hea lugeja, näeme et kasutate vanemat brauseri versiooni või vähelevinud brauserit.

Parema ja terviklikuma kasutajakogemuse tagamiseks soovitame alla laadida uusim versioon mõnest meie toetatud brauserist: