During the Monetary Policy Advisory Council meeting held on 28 December, the Central Bank of Malta left the central intervention rate unchanged at 3.75%.
The Governor observed that there were no developments since the previous meeting to justify a change in the monetary policy stance. He noted that the Bank’s October decision to raise official interest rates had still not been fully transmitted to the entire spectrum of deposit interest rates, resulting in a widening of the bank interest rate margins. The drop in the Bank’s external reserves in November was followed by a further, though smaller fall in December. The decline mainly reflected net sales of foreign exchange to banks in connection with payments for fuel imports but was, in part, also seasonal. The three-month interest rate differential in favour of the Maltese lira was unchanged in December, while the ten-year premium narrowed as euro area yields rose. Looking ahead, however, the Governor stated that a further narrowing of differentials would necessitate a change in the Bank’s monetary policy stance.
In its analysis of recent economic developments, the Monetary Policy Advisory Council welcomed the positive third quarter GDP figures, which provided evidence of a sustained recovery in economic activity. This was accompanied by a pronounced fall in inflation in November, which continued to be related to the unwinding of the previous year’s increase in energy costs, and benign developments in most other price categories. However, the Governor observed that the sharp increase in the food index in November suggested that existing price setting mechanisms were not delivering the outcomes expected in a liberalised market environment. Commenting on the latest balance of payments data, which showed a further deterioration in the current account, the Governor reiterated the importance of strengthening the economy’s earning capacity through the prompt and effective implementation of the measures contained in the National Reform Programme.
The Monetary Policy Advisory Council is due to meet again on 25 January 2007.