Inflation accelerates further - CBM review

The Central Bank has published the second issue of its Quarterly Review for 2008, which analyses economic and financial developments both in Malta and overseas.

In the light of Malta's entry into the euro area at the beginning of this year, the review takes on a new format. It includes a separate analysis of the euro area economy, while the chapters previously covering the Maltese economy are amalgamated into one chapter. A new section is introduced in this chapter focusing on indicators of competitiveness.

With the monetary policy of the European Central Bank (ECB) applying to Malta as well following the adoption of the euro, the review comments on the stance decided on by the ECB's Governing Council during the first half of 2008. It notes that this remained unchanged throughout the period, with the main policy rate, the minimum bid rate on its main refinancing operations, staying at the four per cent level.

At the beginning of the year, the Governing Council confirmed upside risks to price stability in the medium term, but also noted the uncertainty about the impact of the ongoing reappraisal of risks in financial markets on the real economy. As the year progressed, the council noted that risks to price stability increased further and inflation was expected to remain high.

On inflation, the review observes that, as in the rest of the euro area, inflation in Malta accelerated further, with the annual percentage change in the Harmonised Index of Consumer Prices rising from 3.1 per cent in December 2007 to 4.3 per cent in March 2008. The persistent rise in the prices of food items was the main factor behind this increase. Meanwhile, in the labour market, conditions remained buoyant with employment growth remaining strong and unemployment falling.

The review notes that the bank's survey on the perceptions of business operators in the service and construction industries revealed a pick-up in second quarter performance, with almost half of respondents quoting higher turnover than in the first quarter. Cost pressures, however, increased during the second quarter and were reflected in higher selling prices.

As regards fiscal developments, the review notes that during the March quarter the general government deficit widened on a year earlier as expenditure grew at a faster pace than revenue.

In its assessment of monetary developments, the review explains that entry into the euro area brought about significant changes in the method of compilation of Malta's monetary aggregates and the way these are analysed. In particular, it is no longer possible to accurately compile data on currency in circulation, which is a key component of the monetary aggregates.

Residents' deposits grew strongly in the March quarter, mainly supported by a rise in deposits with an agreed maturity of up to two years. The second issue of the Quarterly Review for 2008 is available at www.centralbankmalta.org.