Bank of Estonia raises inflation rate forecast to 15.1 percent

Bank notes.
Bank notes. Source: Bank of Estonia

The latest economic forecast from Bank of Estonia (Eesti Pank), predicts that inflation will rise to 15.1 percent this year and forecasts economic growth at 1.5 percent. According to the Bank of Estonia, the impact of Russia's war on Ukraine on the economy will begin to be felt in the second half of 2022.

Irrespective of the current crisis, Estonia's economy was expected to face a slowdown in growth, said a representative of the bank. In spring, Bank of Estonia forecast a 0.40 percent contraction of the economy in constant prices, but it has now revised this estimate to 1.5 percent growth.

Next year, the central bank expects price growth to slow to 4.3 percent.

The war's main impact will be seen in the loss of export markets, disruption of supply channels and higher commodity prices. While accelerated price increases as a result of the sanctions placed on Russia have already taken hold, the wider impact on the economy will start to be felt in the second half of the year.

In its forecast published at the end of March, Bank of Estonia predicted this year's unemployment rate would be 6.7 percent, but now expects this to be as low as 5.6 percent.

The central bank also expects wage growth of 10.7 percent, rather than the 7.9 percent previously forecast.

Price growth expected to slow next year

Price levels will remain high next year, though price growth will slow down somewhat. Estonia has experienced the highest price growth in the euro zone in recent months, mainly as a result of increased energy prices. This rise in energy costs has had a knock-on effect on prices of other goods and services.

"As for future transactions in gas, electricity and oil, the current geopolitical tensions do not point to short-term stability, meaning the cost of goods in a typical shopping cart will remain higher than previously forecast for a longer period," Bank of Estonia said.

Domestically, price growth is being supported by rising income levels and growing demand, which has been boosted by the release of pension money and increased public spending.

Over the past two years, the amount of additional money injected into the economy through the deficit and EU funds has been around 7 percent of GDP.

Price increases should be constrained by tighter monetary policy. In July, the European Central Bank announced an increase in base interest rates. While the rise will also push up credit costs for homeowners and businesses, Bank of Estonia say the impact on price increases will be slow to take effect.

According to Bank Estonia, "As the rapid price increases in Estonia are largely driven by domestic factors, to curb inflation, the government would need to restrict borrowing in order to finance spending."

The central bank said, that to support people in need, well-targeted measures are required. "Broad and uniform subsidies or tax cuts, on the other hand, would, in the current economic situation, lead to further price increases, if there are no budgetary sources to cover them."

Bank of Estonia said that such cuts or subsidies would increase the country's already considerable budget deficit. With energy prices likely to remain high for some time, this would leave taxpayers to offset the costs of any longer-term generalized subsidies in the future.


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Editor: Michael Cole

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