THE BOARD OF EESTI PANK REDUCED THE PLANNED EXPENSES OF THE CENTRAL BANK

Based on the proposal of the Executive Management, the Board of Eesti Pank made changes in the 1999 budget reducing the central bank expenses. Operational costs of Eesti Pank will diminish by total 16 million kroons in 1999. The biggest sources of economizing will be the salaries and production of notes and coins. In addition, Eesti Pank income will be less than anticipated.

Decrease in income is due to significant changes in the world bond markets caused by developments in the world economy. Based on the main task of the central bank to secure stability of the national currency, the foreign currency reserves of Eesti Pank are invested in euro denominated bonds of developed industrial countries in order to guarantee the reliable maintenance and liquidity of the reserves.

The turbulence in the emerging markets meant capital inflow to developed industrial countries which promoted significant interest rates decline in international bond markets. The interest rate level was kept low by the lowering of central banks' base interest rates and low inflation level.

At the end of last and in the beginning of this year, a significant change took place since the situation in the emerging markets considerably improved and deflation expectations passed. This brought along changes in the interest level dynamics of developed economies - the so-far falling trend was replaced by a rise which also meant a fall in the securities value. For example, the WGBI (world government bond index which shows the average yield of the bonds of developed industrial countries) is by more than one per cent negative. Still, Eesti Pank has prevented net loss from foreign currency reserves investment and guaranteed positive yield of the reserves.

Regardless of economizing and the cut in costs, the less than expected income has created a situation where Eesti Pank, with great probability, will face loss at the end of the year. The exact size of the loss will be clear by spring next year. One reason for the reduction of expenses has been the less than expected income.

However, during the discussion it was concluded that the Eesti Pank conservative investment rules, which aim at the smallest risk possible and high liquidity, will not be changed in order to gain profit. When establishing investment rules, the central bank proceeds from its main task to guarantee the stability of the national currency and invest the reserves backing the kroon and foreign currency reserves into financial instruments of leading industrial countries as risk-free as possible and keeping maximum possible liquidity.

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The Board of Eesti Pank also discussed topics related to monetary development and policy survey, and attended to the information on the prevention of money laundering activities.