The central intervention rate will go up 25
basis points to 4.25% with effect from Wednesday after a decision by the Central
Bank of Malta. The decision was taken by the Governor at the
end of the Monetary Policy Advisory Council meeting held on Tuesday morning.
The Governor considered that against the background of
a further narrowing of interest rate differentials and reductions in the external
reserves, the prevailing central intervention rate no longer provided adequate
support to the exchange rate.
The short-term interest rate premium on the Maltese
lira fell in May to its lowest level since the entry of the lira in ERM II, as
euro interest rates rose faster than comparable rates in Malta amid
growing expectations of continued monetary policy tightening in the euro area. Reflecting upward pressures in the domestic
money market, the primary market rate for three-month Treasury bills continued
to rise. In the capital market,
investors were liquidating Maltese lira assets, suggesting that these were not
offering an adequate interest rate differential over their euro counterparts. Meanwhile, the underlying downward trend in
the Bank’s external reserves continued into May, again partly under the impact
of the conversion of Maltese lira holdings into euro and the retention of
euro-denominated earnings. As in
previous months, the decline in the reserves was accompanied by a further
contraction in the amount of currency notes in circulation.
In its deliberations, the Council noted the first
quarter improvement in export performance and the further drop in unemployment
against the background of falling inflation. While acknowledging these positive
developments, the Governor recalled that in a fixed exchange rate regime, the
primary focus of monetary policy was the stability of the currency. He also pointed out that, following this
latest increase, official interest rates were still below the peak level
reached in 2000.
Referring to the favourable conclusions of the
recently published Convergence Reports of the European Commission and the
European Central Bank, the Governor stressed that until the euro adoption date,
the Bank will continue to use its monetary policy instruments to keep the
Maltese lira stable in ERM II ina bid to ensure a smooth transition to the
euro. He reiterated that there was no
advantage to be gained by converting domestic assets into euro before the changeover
date.
The Monetary Policy Advisory
Council is due to meet again on 28th June 2007.
