EESTI PANK ANNUAL REPORT 2016 2017 © Eesti Pank, 2017 Address Estonia pst 13 15095 Tallinn Phone 668 0719 Fax 668 0836 E-mail [email protected] Website www.eestipank.ee Subscriptions for publications of Eesti Pank Phone 668 0998 Fax 668 0954 e-mail [email protected] Print ISSN 1406-1414 Online ISSN 2382-8811 Layout: Urmas Raidma Printed by Folger Art CONTENTS FOREWORD BY THE GOVERNOR OF EESTI PANK.............................................................4 THE SUPERVISORY BOARD OF EESTI PANK .....................................................................8 ACTIVITIES OF EESTI PANK IN 2016 ................................................................................. 14 PARTICIPATION IN MONETARY POLICY DECISION-MAKING IN THE EUROSYSTEM AND IN IMPLEMENTING DECISIONS ........................................14 Monetary policy decisions .........................................................................................14 Implementing monetary policy decisions in the euro area and Estonia ........................18 Eesti Pank’s monetary policy operations ....................................................................19 ENSURING FINANCIAL STABILITY ................................................................................21 Macroprudential policy ..............................................................................................21 Financial sector policy ...............................................................................................24 Crisis management ...................................................................................................25 MANAGING CURRENCY CIRCULATION ........................................................................26 The role of Eesti Pank ................................................................................................26 Availability of cash .....................................................................................................26 Payment systems ......................................................................................................31 STATISTICS FOR THE ESTONIAN FINANCIAL AND EXTERNAL SECTORS ....................35 Development of new areas of statistics ......................................................................35 Focus on optimising the burden of reporting ..............................................................36 Domestic cooperation ...............................................................................................37 Publication of statistics ..............................................................................................37 Development of the new reporting gateway ...............................................................37 ECONOMIC ANALYSIS AND CONSULTATION ...............................................................39 Economic analysis and monitoring at Eesti Pank ........................................................39 Economic forecasts ...................................................................................................40 Economic research....................................................................................................41 Advisory functions .....................................................................................................42 INTERNATIONAL COOPERATION AND PUBLIC COMMUNICATIONS ............................45 International cooperation ...........................................................................................45 Public relations ..........................................................................................................45 FINANCIAL ASSET MANAGEMENT ...............................................................................48 Reserve management ...............................................................................................48 ACCOUNTABILITY, GOVERNANCE AND ORGANISATION, AND HUMAN RESOURCES POLICY ..................................................51 Central bank accountability .......................................................................................51 Governance and organisation ....................................................................................52 Eesti Pank employees, training and development .......................................................53 ANNUAL ACCOUNTS OF EESTI PANK for the financial year ended 31 December 2016 ....56 APPENDIXES .....................................................................................................................90 APPENDIX 1. THE RESPONSIBILITIES OF THE SUPERVISORY BOARD OF EESTI PANK ..........................................................90 APPENDIX 2. DECISIONS OF THE SUPERVISORY BOARD OF EESTI PANK IN 2016 ....91 APPENDIX 3. DECREES OF THE GOVERNOR OF EESTI PANK IN 2016 ........................93 APPENDIX 4. PUBLICATIONS OF EESTI PANK IN 2016 .................................................95 Eesti Pank Annual Report 2016 4 FOREWORD BY THE GOVERNOR OF EESTI PANK The economy grew modestly in Estonia and in Europe in 2016. Achieving faster growth over the long term and improving living standards will require shared efforts. This means central banks supporting the economy by ensuring low and stable inflation, companies taking risks and investing, parliaments and governments passing painful eco- nomic reforms, and citizens voting wisely in elections. The outlook for Europe is more optimistic The European and global economies fared better last year than in 2015. There was an increase in the second half of last year in economic activity around the globe and growth is expected to strengthen further, though not to the levels it reached before the crisis. Growth in the euro area also con- tinued its recovery in 2016, though it is still held back by the lack of structural reform. The European Central Bank forecast finds that growth in the economy will be 1.6-1.8% in 2016 and the next three years. There are still several risks to economic activity. Any acceleration in growth in 2017 will be limited by the uncertainty caused by the upcoming elections in several euro area countries. It is probable that in the years ahead the risks in the outlook for the global trade environ- ment will be defined by the uncertainty stemming from Brexit and the policies of the new US government. The monetary policy of the central banks of the euro area is certain to play a part in the recovery of the euro area economy, as it has helped hold interest rates low and so has helped support the economy. Although inflation has been held close to zero for the past two years by low energy prices primarily, it picked up to 1.1% in the euro area towards the end of 2016 and continued to rise at the start of 2017. At the start of last year, the Governing Council of the European Central Bank1 found infla- tion to be too low for the economy to run smoothly, but by the end of 2016 the state of the economy had become a little more optimistic and those changes during the year were reflected in the monetary policy decisions of the Governing Council. In reaction to inflation being too low at the start of 2016, the terms of the short-term and long-term monetary policy loans made by central banks to commercial banks were made more favourable and the cost to the banks of keeping deposits at the central banks was raised. The monetary policy asset purchase programme was also increased in size from 60 billion euros to 80 billion euros a month. 1 The monetary policy of the euro area is set by the Governing Council of the European Central Bank, which consists of the members of the bank’s Executive Board and the governors of the national central banks of the euro area. Eesti Pank Annual Report 2016 5 As the economy was developing more strongly by the end of 2016, it was decided in December to reduce the size of the asset purchases back to 60 billion euros a month. It is planned that asset purchases will continue until at least the end of 2017, and longer if nec- essary, until there are clear signs that inflation is moving consistently towards the euro area target of a little below 2% a year over the medium term. The combination of quite strong growth indicators and low interest rates camouflages some fairly major risks for companies, individuals and central banks, as asset prices may rise so far in some markets that bubbles could start to appear. Asset purchases also increase the risks that Eesti Pank faces, and so we need to continue increasing our reserves to reduce that risk. The dangers of stimulating the national economy The Estonian economy grew in 2016 at one of its slowest rates since the crisis. This was mainly because of problems in some branches of the economy, notably oil shale pro- duction, energy, agriculture and real estate activities, and economic difficulties in some important trading partners. An increase in the rate of growth was evident in the second half of the year, and the situation improved in most sectors. Confidence indicators for the private sector show greater optimism about the near future and the increase in output volumes indicates that companies will be looking to recruit additional staff. The problem though is the shortage of suitable labour, which has caused the number of vacancies to rise steadily in recent years, and the effect on growth in the economy of the shortage of labour is becoming ever more apparent. There remain some contradictions in the Estonian economy, as growth has been slow but demand for employees has been high, leading wages to rise rapidly. These circumstances