The European Central Bank’s recent decision on quantitative easing would make Malta more competitive in manufacturing and tourism, according to Central Bank Governor Josef Bonnici.
Addressing the House Committee on Economic and Financial Affairs, Prof. Bonnici said interest rates were set to be lowered and this would release more money on the market and increase wealth with one of the net results being the stimulation of the property market.
Prof Bonnici said that the situation was such that normal monetary interventions were failing and the ECB, like other Central Banks such as the US Federal Reserve Bank, had to take steps.
He said that the exchange rate would be affected by this decision rendering the Maltese product, both manufacturing and touristic, more competitive. This impact, said Prof Bonnici was more important for Malta than reducing the interest rates.
Prof Bonnici said that another effect would be an increase in bank lending, since banks would be financially discouraged from ‘parking’ money with the Central Bank. He predicted also an increase in bond-issue to soak up the extra wealth generated by this ECB move. The system provided for a risk-sharing scenario between the national and the supra-national institutions.
In late January the ECB launched a bid to revitalise the Eurozone economy and to counter deflation with a €60-billion-a-month bond-buying programme. Deflation has a negative effect on interest rates and on the purchasing power, the effect on national debt becomes heavier and consumption and investment are postponed.
ECB President Mario Draghi was quoted as saying that the ECB would buy more than one trillion euros in assets including government and private bonds by September 2016. This move was aimed at raising inflation in the Eurozone to the generally accepted two per cent. Germany fought this move tooth and nail saying that such a move would de-motivate Eurozone countries from reforming their economies.
Replying to questions by MPs, Prof Bonnici said that Malta was quite self-contained in the financial sector – a positive element in terms of it being safeguarded from market buffeting. However, he thought Malta might seek to be more open to the international market.
Prof Bonnici also referred to the economic stagnation in many Eurozone countries and referred to Germany’s position which feared that this accommodation may inhibit structural change in stagnant economies. Prof Bonnici said that this type of funding could be of great benefit to the tourism sector since sustainability in this sector now has moved from numbers to quality.
He said that if Malta stopped looking for new niches, its economy would stagnate and the benefits of quantitative easing would be lost. One of the aspects which the country needed to look into is the servicing of particular property markets such as luxury and high-finish property which seem to be absent from the market. This could be the right time for government to look into stimulating this growth area.