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CBM's central intervention rate down to 4%
By MaltaMedia News
Dec 29, 2007 - 9:15:43 AM
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The Central Bank of Malta today reduced the central intervention rate by 25 basis points to 4.00% with immediate effect. The decision was taken by the Governor at the end of the Monetary Policy Advisory Council (MPAC) meeting held on Friday morning.
The Governor explained that the reduction in the central intervention rate completes the process of convergence of official interest rates in Malta with those of the euro area. He recalled that under Malta’s existing fixed exchange rate regime, the central intervention rate embodied a premium to compensate investors for exchange rate risk.
With the adoption of the euro on 1 January 2008, this risk and the consequent premium on official short-term interest rates will disappear. Hence, at its new level of 4% the central intervention rate is identical to the minimum bid rate on the main refinancing operations set by the European Central Bank (ECB). The Governor expected the latter rate to serve as the benchmark interest rate in Malta once the euro becomes the national currency, influencing domestic money market rates as well as bank deposit and lending rates.
The overnight deposit and lending rates set by the Central Bank of Malta, which are currently linked to the central intervention rate, will also be replaced by the respective interest rates set by the ECB on similar instruments, that is the overnight deposit facility and the marginal lending facility.
The Central Bank of Malta’s net foreign assets declined in December as the Bank continued to be a net seller of foreign exchange to credit institutions, with seasonal demand being reinforced by the continued conversion of Maltese lira holdings into euro. The short-term premium on the Maltese lira increased during the month, while the long-term interest rate differential remained broadly unchanged.
In its review of recent economic data, the Council noted evidence of continued strong growth, as seen in the GDP data for the third quarter. However, the Council also observed that inflation accelerated further against a backdrop of rising global prices of key commodities, particularly food and oil, which were also adversely affecting the trade balance.
The Governor warned that in the context of upside risks to inflation and downside risks to global growth, and given Malta’s participation in a monetary union, it is even more important to ensure that fiscal policy continues to support macroeconomic stability, that wage developments remain in line with productivity growth and that further productivity-enhancing structural reforms be introduced to safeguard the international competitiveness of the Maltese economy.
In the meantime, following today’s decision by the Central Bank of Malta to reduce the
central intervention rate by 25 basis points to 4.00%, Bank of Valletta
announced that, with effect from 1st January 2008, it is also changing
its Bank Base Rate (BBR) to 4.00%.
The Bank said that, upon the adoption of the euro on the 1st January
2008 and until further notice, it will be adopting the ECB Central
Refinancing Rate as its Base Rate.
© Copyright 2007 by MaltaMedia.com
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Dec 29, 2007 - 7:26:39 PM CET
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