During its monthly meeting held on 4 July the Monetary Policy Advisory Council left the central intervention rate unchanged at 3.50%.
The Governor of the Central Bank of Malta observed that while it was too early for a full assessment to be made of the impact of the May increase in the Bank’s central intervention rate, there were signs that the decision had been effectively transmitted to the financial markets. The response of the credit institutions was reflected in higher interest rates payable on term deposits, which in turn have attracted a significant inflow of funds. The May decision had also led to an initial widening of the interest rate differential in favour of the Maltese lira, which was a contributory factor in the small rise in the Bank’s external reserves in June. The Governor pointed out, however, that against a background of rising rates abroad, the differential had already started to narrow once again. The Bank will, therefore, continue to monitor closely the relevant indicators with a view to assessing their implications for the monetary policy stance.
In its deliberations the Council also evaluated the latest economic data. These included GDP statistics for the first quarter, which confirmed earlier signs of a modest recovery in economic activity. These indications were supported by fiscal data pointing to a sustained recovery in tax revenues. The latter, which was accompanied by a slight fall in Government expenditure, resulted in a further reduction in the deficit, suggesting that the fiscal consolidation programme remains on track.
On the other hand, the Council noted with concern the persistence of inflationary pressures in May, mainly reflecting higher energy costs. While these imported price shocks cannot be avoided, it was important that they should not be compounded by unjustified price increases generated locally.
The Monetary Policy Advisory Council is due to meet again on 28 July 2006.