Estonia central bank urges government to limit impact of price rises

April 28, 2011 - 0:0

TALLINN (Reuters) - Estonia’s central bank called on the government on Wednesday to cut its budget deficit and for efforts to improve competitiveness by not allowing global commodity prices to impact broader price and wage increases.

Estonia joined the euro zone on January 1, but has seen prices increase by over 5 percent year-on-year in recent months as higher global food and energy prices impact on prices. The country has been warned by the European Central Bank to try to keep price increases under control.
“Looking ahead, it is very important to avoid the pass-through of commodity prices, since this would harm the competitiveness of enterprises,” the bank said in an economic policy statement.
The bank said the government had to focus on improving domestic competitiveness and on the setting of administered prices, as well as prevent wage growth from exceeding productivity growth. The bank also said that it was essential that the government continue with its plans to reduce the budget deficit and improve the efficiency of the public sector.
“Higher tax income, which results from faster growth, should first and foremost be used for achieving fiscal balance and restoring reserves,” the bank said.
The bank said that the amount of bad loans in the banking system overdue by more than 60 days should continues to fall to under 5 percent of the total loan portfolio in 2011 and decease to 3.5 percent in 2012. Bad loans in Estonia’s banking system peaked in August 2010 at 7.3 percent of the total loan portfolio.
The bank said the main risk for taking new loans was a possible deterioration of external demand, while inflation remained a danger to borrowers’ income.