Foreign reserves as a confidence indicator

In countries with a fixed exchange rate system, the size and changes of the central bank's foreign exchange reserves indicate the reliability of the central bank's monetary policy.

A remarkable decrease in foreign exchange reserves in circumstances where the central bank's reserves only cover a part of its liabilities may lead to the bank's inability to maintain the fixed exchange rate.

The currency board system, which is the foundation of the Estonian monetary system, automatically guarantees the coverage of all the central bank's liabilities by foreign reserves and a decrease in the central bank's foreign reserves does not directly threaten the exchange rate. Nevertheless, it is not impossible that foreign investors unfamiliar with the Estonian monetary system would react negatively to such news.

At noon on every fifth banking day of the month, Eesti Pank publishes its balance sheet as at the end of the last month and data concerning the amount of foreign reserves.