At its monthly Monetary Policy Advisory Council meeting held on 26 February, the Central Bank of Malta left the central intervention rate unchanged at 4.00%.
The Governor of the Central Bank of Malta considered that, at their current level, official interest rates provided adequate support to the exchange rate peg. The January increase in the central intervention rate had been transmitted to bank deposit and lending rates, and appeared to have had a favourable impact on the demand for assets denominated in the Maltese lira, including bank deposits. The interest rate hike had also led to a widening of the short-term interest rate differential in favour of the Maltese lira, though this was partly reversed in February following a further upward movement in money market interest rates in the euro area. The Bank’s external reserves declined further going into February, partly due to seasonal factors, but also because of the ongoing process of conversion of domestic currency into euro.
While new data on the economy were limited, the Council noted the continuing stability in the labour market as well as improvements in the external sector, notably the merchandise trade balance and the tourism industry, in the final two months of 2006. With regard to inflation, while the overall rate does not point to generalized upward pressures on prices, further increases in certain price categories, such as food, remained a cause for concern.
The Governor reiterated the need to consolidate recent improvements in the underlying economic performance by reducing the fiscal deficit further through measures to cut recurrent expenditure and to redirect resources to investment in both physical and human capital, and by enhancing the competitiveness of the economy through appropriate structural reforms.
The Monetary Policy Advisory Council is scheduled to meet again on 26 March 2007.