Monetary policy

The Bank of Estonia, founded in 1919, and restored in 1990 as the legal successor of the central bank of the first period of independence (1918–1940), belongs among the twenty five oldest central banks in the world. In the best international tradition, the Bank is fully independent, and not subordinated to the government or any other executive state institution, and is accountable only to parliament.

The main task of the Bank is formulating and realising state monetary policy. In addition, it oversees the credit institutions and helps to safeguard financial stability, issues coins and banknotes, keeps a check on payment systems and administers the state’s foreign currency reserves.

The main aim of the monetary policy of the Bank of Estonia is to secure a continuously low inflation rate and the overall stability of consumer prices. This in turn promotes investments and savings, thus supporting the effective distribution of capital in the economy, and via that the long-term growth potential of the economy. In formulating and realising its monetary policy, the Bank takes into account the constantly changing economic environment and the development of the structures of financial markets.

The technical realisation of the monetary policy takes place through the central bank’s transactions on the inter-banks financial market (e.g. buying or selling securities, lending money directly to banks, etc.); less frequently by establishing regulations for the financial institutions functioning in the monetary system, mostly banks. These steps do not directly ensure a low inflation rate, but their purpose is to influence certain economic indicators (interest rates, exchange rate, growth rate of money supply, etc.) that in turn have an indirect connection to the price levels in the economy.

In addition to these steps that have a direct influence on the markets, the Bank of Estonia uses other means as well in order to achieve the goals set by its monetary policies, e.g. advising the government on carrying out the budgetary policy that also has an impact on economic activity.

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