The central intervention rate was left unchanged at 3.75% following the Monetary Policy Advisory Council meeting held on 27 November.
The Governor of the Central Bank of Malta observed that it was too soon for a full assessment to be made of the impact of the October increase in the Bank’s central intervention rate. The response of the credit institutions had only been reflected so far in interest rates payable on term deposits and in lending rates. The October decision had also led to an initial widening of the short-term interest rate differential in favour of the Maltese lira, but the premium stabilised at a somewhat lower level in November following a further upward movement in euro market interest rates. After a small increase in October, the Bank’s external reserves fell in November to date under the combined impact of seasonal and special factors. The latter included the payment of tax refunds, capital and interest repayments on foreign loans and the purchase of equipment for the new hospital. While the current monetary policy stance seemed appropriate, however, the Governor pointed out that in view of expectations of a further rise in euro area interest rates beyond that already factored in by the markets, and the narrowing of the differential in favour of Maltese lira assets that such an increase would imply, the Bank’s policy stance would have to be reassessed.
In its evaluation of the latest economic data, the Council welcomed the decline in the October HICP inflation index, noting that this not only reflected the base effect related to the increase in fuel prices in the same month last year, but also a high degree of stability in the other components of the index. This notwithstanding, the Governor drew attention to the further widening of the merchandise trade deficit in September, a factor which continues to weigh on the country’s external reserves. The persistent external imbalance underlines the need for further structural reforms designed to raise productivity levels and improve export competitiveness.
The Monetary Policy Advisory Council is due to meet again on 28 December 2006.