Central Bank eases monetary policy stance

The Central Bank of Malta yesterday eased its monetary policy stance by lowering the central intervention rate by 25 basis points to 3.5 per cent.
In explaining the decision, taken by the Central Bank’s Monetary Policy Advisory Council yesterday, CBM Governor Michael C. Bonello said he considered there were grounds for believing that lower official interest rates were compatible with the maintenance of the exchange rate peg at this time.
The Central Bank’s external reserves, a key indicator of the sustainability of the exchange rate peg, had risen further in April and into the first half of May. At the same time the continued weakness in the international economic environment had led to a drop in interest rates abroad, to such an extent that the interest rate differential in favour of the Maltese lira rose beyond the level that seemed appropriate under the circumstances.
Within this context, Bonello observed that the end of uncertainty over Malta’s relations with the European Union, and the economic policy disciplines implied by membership, added to the credibility of the peg. The persistence of high levels of liquidity in domestic financial markets also supported yesterday’s cut.
The CBM added that inflationary pressures were unlikely to emerge in the near term and noted the drop in inflation registered during the first quarter of the year.
However, the Bank also emphasised that sluggish growth in Malta’s main export markets suggests that local economic activity will continue to expand below its potential rate, despite the expansionary stance of fiscal policy.
The Bank explains that this consideration also favoured an easing of the monetary policy stance at this time, though the Council will continue to monitor the process of fiscal consolidation.
The Monetary Policy Advisory Council is due to meet again on
24 June.