Central Bank issues Quarterly Review

The Central Bank has published the fourth issue of its Quarterly Review for 2005, which analyses economic and financial developments both in Malta and abroad during the third quarter of 2005. The Review also carries a speech by the governor on the pursuit of economic growth in a stable macroeconomic environment.

In its Economic Survey, the Review observes that following the entry of the Maltese lira into ERM II last May, the Maltese currency maintained its central parity rate of LM/e=0.4293, in line with the authorities' commitment. The exchange rate was well supported by the bank's net foreign assets, which increased strongly during the third quarter and going into the fourth, reversing the loss recorded during the first half of the year.

Against this background, the bank's monetary policy stance remained unchanged, with the bank keeping the central intervention rate at 3.25 per cent throughout the third and fourth quarters of 2005.

With official interest rates remaining unchanged, domestic money market interest rates were stable during the third quarter, though they fell slightly in October. However, the short-term premium on the Maltese lira narrowed between June and October as short-term interest rates in the euro area rose gradually. The long-term premium also narrowed during the period, reflecting a decline in the yield on Government bonds. On the Malta Stock Exchange the share index rose in the third quarter, gaining almost 15 per cent over the second quarter.

In its assessment of monetary developments, the Review observes that broad money continued to expand, albeit at a slower pace, during the quarter reviewed. Monetary growth was driven by an increase in the net foreign assets of the banking system. In contrast, domestic credit declined as a sharp fall in net claims on central government was only partly offset by higher claims on other residents.

Turning to the domestic economy, the Review notes that the pace of activity continued to recover during the third quarter. Real GDP grew by 2.9 per cent on a year earlier, led by domestic demand. Moreover, compared to the preceding quarter, the negative contribution of net exports to growth was smaller. In the manufacturing sector, a further drop in exports of electronic components was partly made up for by increases in other export categories, while domestic sales were largely stable. In the tourism sector the number of tourists increased, but this gain was partly offset by a reduction in the length of stay.

On price developments the Review observes that inflation was stable in the third quarter. The year-on-year increases in the HICP and the RPI stood at 2.1 per cent and 2.9 per cent respectively in September, unchanged from their June levels. The main contributors to inflation were food and energy prices. The latter, in fact, pushed annual inflation rates up significantly in October.

Records held by the Employ-ment and Training Corporation showed a year-on-year fall in the labour supply during the third quarter. However, the gainfully occupied population rose slightly and the unemployment rate fell to 4.9 per cent from 5.5 per cent a year earlier. In contrast, Labour Force Survey results for July and August 2005 indicate a decline in both the labour supply and the employed population compared with the third quarter of 2004. The LFS also shows a rise in the unemployment rate to 7.5 per cent, from 7.3 per cent a year earlier.

The Central Bank's latest business perceptions survey, carried out between October and Novem-ber 2005, showed that most firms were pessimistic about the general economic situation over the next six months. In terms of their own performance, however, most respondents were anticipating turnover to remain broadly stable and profitability to improve in the fourth quarter.

On developments in the balance of payments, the Review reports that during the third quarter of 2005 the deficit on the current account narrowed. This was mainly due to lower net outflows on the income account combined with a larger surplus on services which together offset a widening of the merchandise trade deficit. Furthermore, after excluding movements in official reserves, net inflows on the capital and financial account increased, fuelled by a rise in direct investment inflows and lower net portfolio investment overseas.

Meanwhile, the Maltese lira, being fully pegged to the euro, moved in parallel with the latter against the other major currencies during the September quarter: the lira continued to depreciate versus the US dollar and to strengthen against the pound sterling and, to a lesser extent, also against the yen. Going into the fourth quarter, the lira weakened further against the US dollar, appreciated against the yen and remained broadly stable against sterling.

As far as fiscal developments are concerned, the Review notes that during the third quarter of 2005 the Consolidated Fund balance swung into surplus. Thus, at Lm85.4 million, the deficit for the first nine months of the year was down by Lm24.5 million compared with the previous year. According to the Budget estimates for 2006, the Consolidated Fund deficit is projected to fall from an estimated Lm76 million for 2005 as a whole to just under Lm55 million.

The fourth issue of the Quarterly Review for 2005 is available on the Central Bank Website: www.centralbankmalta.com