- Increase in interest rates

On 25 January the Central Bank of Malta raised the central intervention rate by 25 basis points to 4.00%.

The Governor of the Central Bank of Malta observed that, at their previous levels, official interest rates were no longer adequately supporting the exchange rate peg. The Governor also noted that the decision was taken against the background of a further decline in the Bank’s external reserves in January and a marked narrowing of interest rate differentials in favour of the Maltese lira that resulted from rising euro area rates. The Governor remarked that, while the drop in the reserves was partly due to seasonal factors, there was growing evidence of a premature conversion of domestic currency holdings into euro and increased retention of euro-denominated export earnings. Following the rise in the central intervention rate, it is expected that assets denominated in Maltese liri, particularly bank deposits, will become more attractive.

In its deliberations the Monetary Policy Advisory Council also reviewed the latest economic data, which suggested that the recovery in economic activity is ongoing. This was reflected in a further improvement in export performance, in employment growth and in a broader-based expansion of credit to the private sector, in a low-inflation environment. This notwithstanding, the Governor stressed the importance of consolidating the recovery through further measures to enhance the economy’s international competitiveness.

The Monetary Policy Advisory Council is due to meet again on 26 February 2007.

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