Stress on more competitive market conditions

The Central Bank of Malta yesterday left the central intervention rate unchanged at 3.25 per cent.

The Central Bank Governor considered that the level of the central intervention rate remained appropriate, even though the short-term interest rate differential on the lira had narrowed, mainly as a result of higher yields on the euro, the Central Bank said.

The Bank's external reserves had, in fact, increased strongly in October, largely reflecting capital movements, though this gain was partly reversed in the following month, also in response to seasonal factors. Against this background, domestic financial markets were stable.

The Governor recalled that in a fixed exchange rate regime the conduct of monetary policy is conditioned by developments in the balance of payments. In this regard, he pointed out that although the current account deficit narrowed in the third quarter, it still showed a sizable deterioration since the beginning of the year.

A sustained reduction in this external deficit required the correction of the fiscal imbalance and greater flexibility in product and factor markets. As to the former, the Governor welcomed indications that the fiscal targets for 2005 would be reached and that the process of fiscal consolidation would continue to be pursued. However, this effort had to be complemented by the promotion of more competitive market conditions. This was necessary to minimise inflationary pressures, which have been in evidence in recent months.

The Monetary Policy Advisory Council meets again on December 29.