Central Bank hints at monetary policy review

The Governor of the Central Bank yesterday left the central intervention rate unchanged at 3.50 per cent but warned he anticipated the need for a reappraisal of the bank's monetary policy stance in the near term because of expected further increases in official euro interest rates.

The Central Bank quoted the Governor, Michael Bonello, as remarking at the end of the monthly meeting of the Monetary Policy Advisory Council that domestic financial market conditions had remained broadly unchanged since the previous council meeting and the current monetary policy stance continued to be appropriate.

After increasing in August, the Central Bank's external reserves rose further in September, although this latest gain largely reflected special factors, including reversible inflows related to the activities of some companies engaged in international business operations.

"At the same time, the short-term interest rate differential in favour of the Maltese lira narrowed further in September, as a result of higher euro interest rates.

"In the light of these developments, and of the expected further increase in official euro interest rates, therefore, the Governor anticipated the need for a reappraisal of the Bank's monetary policy stance in the near term," the Central Bank said. It said the monetary policy decision taken yesterday was set against the background of an assessment of the economy's foreign exchange earning capacity.

"In this context the council noted that though there had been a further improvement in the export performance of the manufacturing sector in the second quarter, this was not complemented by a similar trend in the services sector, notably in transportation and travel. This factor had contributed to a widening of the current account deficit. "The council emphasised the importance of achieving a reduction in this deficit as a means of strengthening the economy's external payments position, but pointed out that monetary policy could only play a limited role in this regard. A lasting correction in the current account deficit can only come about through focused efforts by the government and the other social partners designed to enhance Malta's competitive position, including measures to control costs and raise productivity levels."

The Monetary Policy Advisory Council meets again at the end of October.

The Central Intervention Rate was last adjusted in May, when it was raised by 25 basis points. That had been the first raise in the rate in 13 months.