Bank of Estonia vice-president Ülo Kaasik noted that the price inflation has been significant in energy and industry alike. "Commodity prices will slow down in the next year," he said, adding that while energy prices will not likely increase as much next year, they may stabilize at their current high levels.

In the second half of the year, inflation is set to slow down, but several other things, such as food, will get more expensive. "If we are currently mostly talking about increasing energy prices, then a large part of next year's inflation will come from other factors," Kaasik said.

In addition to the rapid inflation on world food markets, domestic price pressure has also begun to grow, through which the increased wages carry over to the prices of other services and sectors.

Labor shortages to hinder expansion of business

Kaasik said that companies in most sectors have notified that they intend to increase production and hire more people. "Never before have Estonian entrepreneurs said that they are working at full capacity," the central bank official said.

"The situation on the labor market continues to be tense. Unemployment has almost dropped to pre-crisis levels and we see that it will remain low for a long time. Our estimates show that wage increases over the coming years will be rapid," Kaasik said.

Bank of Estonia governor Madis Müller noted that entrepreneurs point to labor shortages as the main factor for why growth might be hindered. "They sense that they need to increase prices to retain profitability and the economy creates a good foundation for it," Müller said.

A fully functioning economy goes hand-in-hand with price inflation, which is caused by higher wage expectations and increased labor costs, as well as increased energy prices.

"Meaning, this does not say that the Estonian state of affairs has reached pre-crisis levels according to entrepreneurs, but rather that it has very clearly exceeded the pre-crisis levels," Kaasik said.

"True, there are sectors, which have not seen similar growth," Kaasik said, pointing to accommodation and catering, which relate largely to tourism.

The central bank vice-president said he senses danger in the wage increases, because it might set the competitiveness of Estonian companies at risk.

Speaking of the state's role in the economy, Müller said that the public sector has already limited wage growth and that while the central bank notes that there are no reasons for employees to ask for higher wages, they see it as an option for the state to limit price inflation.

Müller said another option would be a balanced state budget. "We should make an effort toward balancing out the state's costs and revenue, because a deficit state budget and increased expenses cause additional demand in the economy and are an additional source of price increases," the central bank governor noted.

Euribor rate could turn positive in a few years

"The normalization of monetary policy is continuing and markets expect interest rates to increase somewhat," Ülo Kaasik said. As of the current forecast, Kaasik said the great conditions for loans should continue.

At the same time, the Euribor rate, which affects Estonian borrowers, could approach zero. "The market expectation is that Euribor interest rates could turn positive in 2024," Martin Müller said.

The central bank governor noted that price inflation in real estate has been very fast and if credit growth also picks up, Bank of Estonia is prepared to restructure and tighten framework conditions for housing loans.

Müller noted that the first thing would be to adjust the rule about the percentages people are allowed to cover loan payments out of their paychecks, but he specified that the bank has not plan in place and the current forecast does not see there being a need to adjust conditions.

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