Central intervention rate lowered by 25 basis points

The Central Bank of Malta yesterday lowered the central intervention rate by 25 basis points to 3.50 per cent after leaving it unchanged at 3.75 per cent last month.

The intervention rate is the rate at which the Central Bank intervenes in the interbank market to manage day-to-day liquidity.

The decision to reduce it was taken by the governor, Michael Bonello, following the Monetary Policy Advisory Council meeting yesterday morning.

The governor considered that there were grounds for believing that lower official interest rates were compatible with the maintenance of the exchange rate peg at this time.

The Central Bank's external reserves, which are a key indicator of the sustainability of the peg, had risen further in April and into the first half of May.

At the same time, the continued weakness in the international economic environment led to a drop in interest rates abroad, such that the interest rate differential in favour of the Maltese lira rose beyond the level that seemed appropriate in the circumstances.

In this context the governor observed that the ending of uncertainty over Malta's relations with the European Union, and the economic policy disciplines implied by membership, added to the credibility of the peg. The persistence of high levels of liquidity in domestic financial markets also supported the decision to cut the central intervention rate.

Furthermore, in the light of the bank's mandate to maintain price stability, the council also noted with satisfaction the drop in inflation registered during the first quarter of 2003, and considered that inflationary pressures were unlikely to emerge in the near term.

At the same time, sluggish growth in the main export markets suggests that economic activity in Malta will continue to expand at below its potential rate, despite the expansionary stance of fiscal policy. This consideration, too, favoured an easing of the monetary policy stance at this time, though the council will continue to monitor the process of fiscal consolidation.

The Monetary Policy Advisory Council is due to meet again on June 24.

This latest move by the monetary authorities follows a decision by the two larger banks in Malta - HSBC Bank and Bank of Valletta - to reduce their interest rate on one-year deposits to 3.5 per cent in what observers deemed to be a signal that they wanted to discourage further deposits. At the time the banks took their decision the Central Bank's intervention rate still stood at 3.75 per cent.

APS Bank yesterday announced changes to its interest rates as from today. It said existing commercial and personal loan customers, including APluS, Home Loans and AgriPluS will benefit from the decision, as the interest rate reduction of 0.25 per cent will be applied to all accounts.

The interest rates on current account balances, savings accounts and fixed deposit accounts opened or renewed on or after today will be reduced by 0.25 per cent. The interest rate for the bank's three-day notice bonanza account will now be 1.75 per cent per annum.