The European Central Bank (ECB) is raising three key interest rates to 3, 3.25 and 2.5 percent next week, and as it intends to continue raising interest rates in an effort to slow inflation, the euro area's central bank is slated to hike them another 0.5 percentage points again next month, Bank of Estonia Governor Madis Müller said Friday.
When it comes to rapid price increases, a cause for concern are indications that core inflation, i.e. the more permanent element of the price increase, is showing no signs of abating, Müller, a member of the Governing Council of the ECB, said in a longer blog post according to a press release.
More sustained price pressure can be analyzed by examining not just aggregate inflation figures, but excluding changes in the prices of energy, food and other goods and services with highly volatile prices. Core inflation in the euro area has remained stably above 5 percent for the past four months already, and didn't fall in January either.
According to the Estonian central bank governor, the interest hikes planned for this month and next are necessary to cut in on too rapid price growth as well as overcome inherently more persistent pressures that to date continue to drive up price levels.
He added that it's yet too soon as well as too risky to assume that an economic slowdown will in itself also lead to the growth in prices abating.
The main drivers of inflation are changing both in the euro area and in Estonia. While last year, overall increase in prices was influenced primarily by higher energy prices, this year, the increase in the prices of food and other goods and services has come to the fore.
The overall price level in Estonia has remained fairly stable since last year. A gradual slowdown in price increases in Estonia can nonetheless be expected in the coming months, due largely to the fact that last year's prices, which comprise the reference base, rose rapidly in the first half of the year.
Inflation slowing and the economy returning to more stable growth is also important for people in Estonia who have taken out home loans and currently have to cope with higher monthly mortgage payments than before.
According to Müller, it may sound contradictory, but the ECB's current tighter monetary policy, i.e. higher interest rates, will help avoid significantly higher loan payments in the future. If central banks were to hesitate right now on raising interest rates, they would in all likelihood have to raise them even higher in the future in order to get inflation under control, he explained. The stabilization of the economy will also create opportunities for the future growth of people's incomes.
As banks in Estonia have been reasonably conservative in lending in recent years, there is little reason to worry that borrowers will struggle with their loan repayments even as interest rates rise. Certainly a more significant determining factor here, he added, is maintaining one's job and stable income.
Click here for more info about Thursday's announced interest rate hikes and the ECB's other monetary policy decisions.
Editor: Aili Vahtla