Central Bank raises interest rates

The Central Bank yesterday raised the central intervention rate by 25 basis points to 3.5 per cent in reaction to rising interest rates abroad and inflation.

This was the first change since April last year when the rate was raised by a similar margin.

The decision was taken by the Governor at the end of the monthly Monetary Policy Advisory Council meeting.

On the basis of the analysis presented and the advice of the council, the Governor concluded that, on balance, a tightening of the monetary policy stance was called for, the Central Bank said.

"Although the Bank's external reserves increased substantially in May, reflecting the receipt of privatisation proceeds, there was additional evidence of an underlying downward trend.

"To a significant extent, this was associated with a progressive narrowing in recent months of the interest rate differential in favour of the Maltese lira, caused mainly by rising euro interest rates, which continued in May. The Governor expected that the decision to raise the Bank's central intervention rate would enhance the attractiveness of Maltese lira assets, particularly bank deposits.

"An increase in interest rates also appeared appropriate in the light of the council's continuing concern about the rapid growth in imports of consumer goods and the further acceleration in the rate of inflation," the Bank said.

In its deliberations, the council recognised that the economy still seemed to be recovering modestly, but stressed that in a fixed exchange rate regime the primary focus of monetary policy was the stability of the currency. The latter is a necessary condition for sustained economic growth, it said.

The Central Bank last raised the central intervention rate - by 25 basis points to 3.25 per cent - on April 8, 2005. That had been the first hike in the rate for a number of years.

The Monetary Policy Advisory Council is due to meet again on July 4.