In a recent interview with global business news service Bloomberg, Central Bank of Malta (ECB) Governor Michael C. Bonello said that he was “satisfied” with current the ECB policy settings, which see benchmark interest rates at a record low of 1 per cent.
“We believe that our policy stance is correct at the moment,” Bonello said. “We have addressed the problem that there was in the money market and interest rates have come down. So from that point of view we are satisfied,” the CBM Governor was quoted as saying.
“Monetary policy works with a lag so the impact of some past decisions is probably still in the pipeline. One has to give time for these various decisions to work.”
While ECB President Jean-Claude Trichet had left the door open to more rate reductions, Bonello dismissed these suggestions. “There hasn’t been any discussion on lowering interest rates further,” he told Bloomberg.
The CBM Governor said there were indications of an easing recession in Europe, with the contraction in the manufacturing industry slowing in June and confidence in the economic outlook rising to a seven-month high.
“There are some signs of bottoming out,” Bonello said. “But I think it is premature to talk of a sustainable recovery. We still have to start on the rising path again; the return to potential growth rates is clearly going to be slow.”
Bonello said everything the ECB has done so far has been aimed at getting money markets functioning again, “and we are satisfied with the outcome so far.”
He explained how risk premiums “have fallen significantly along the yield curve and the lower interest rates have been passed on to both households and corporations.”
“But most importantly, inflation expectations over the medium to longer term remain firmly anchored in line with our price stability objectives, so we believe that our policy stance at this time is the right one,” he insisted.
The ECB last month predicted the economy of the 16 euro zone nations would contract about 4.6 per cent this year and only return to growth in mid-2010.
Despite the fact that the inflation rate fell to minus 0.1 per cent in June, Bonello insisted that the development of a deflationary spiral was unlikely.
“We expect the euro-area inflation rate to become positive again in the autumn,” he told Bloomberg. “The risk of deflation in the short to medium term is rather limited for the euro area at this time,” the CBM was quoted as saying.
In addition to the interest rate cut, the ECB had lent banks as much money as they wanted and started buying €60 billion of covered bonds in an effort to stem the worst recession since World War II.
However, the measures taken by the ECB paled in comparison with the monetary polices of the US Federal Reserve and Bank of England, which have lowered their key rates to close to zero and launched asset-purchase programs almost 20 times the size of the ECB’s.