Central Bank Quarterly Review
from the Central Bank of Malta
The second issue of the Quarterly Review for 2005, published by the Central Bank of Malta, analyses economic and financial developments both in Malta and abroad during the first quarter of this year.
In commenting on monetary policy developments, the Review notes that after maintaining an unchanged stance during the first quarter the Bank raised the central intervention rate by 25 basis points to 3.25% in April. The decision was taken in the light of a further decline in the Bank’s external reserves, which, while continuing to reflect a change in consumption patterns following the total liberalisation of trade, was being compounded by strong growth in credit to the personal sector.
The entry of the Maltese lira into ERM II at the beginning of May had a positive impact on financial market sentiment, with the interest rate differential in favour of the Maltese lira increasing and the level of the Bank’s external reserves stabilising. Consequently, the Bank left the central intervention rate unchanged during the remainder of the second quarter.
In its assessment of the monetary sector, the Review notes that monetary growth remained weak during the first quarter, partly reflecting shifts from bank deposits into alternative assets, although the running down of deposits for consumption purposes may also have contributed. Domestic credit continued to increase during the quarter, driven mainly by growth in loans to the private sector, but the net foreign assets of the banking system contracted further.
Meanwhile short-term interest rates and yields on longer-term bonds remained stable over this period. In the equity market, the MSE share index rose, reflecting broad-based investor interest. In April money market rates moved up in tandem with official rates. The Review notes that the economy contracted marginally during the first three months of 2005, following two consecutive quarters of growth, reflecting weak export activity, particularly in the electronics sector. The tourism sector, too, failed to provide a significant boost to growth.
Nevertheless, some improvement was reported in the labour market, with higher employment and a decline in both the unemployment rate and the number of those registering for work. Although the rising trend in the official inflation rate moderated, upward pressures on prices persisted, as developments in international oil prices affected fuel costs and, more indirectly, utility prices. The Bank’s latest business perception survey suggests a possible improvement in economic conditions for the rest of the year.
Turning to the balance of payments, the Review highlights the continued widening of the current account deficit in the first quarter of 2005, when compared to the same quarter of 2004. This was the result of a larger merchandise trade gap, which outweighed positive balances on the services and income components. After excluding movements in the official reserves, the surplus on the capital and financial account registered an increase over the first quarter.
The Review also observes that during the first quarter, the Maltese lira appreciated against the euro and the Japanese yen but lost ground against the US dollar and the pound sterling. In the month prior to its participation in ERM II on May 2, when it was fixed at a level of Lm0.4293 against the euro, the Maltese lira gained further ground against the European unit. At the same time it continued to depreciate steadily against both the dollar and the pound.
Commenting on fiscal developments, the Review reports that during the first quarter the deficit on the Consolidated Fund was larger than in the same period last year as an increase in expenditure exceeded a rise in revenue. Factors contributing to this widening were the new expenditure commitments related to EU membership as well as the removal of the remaining duties on EU products.
from the Central Bank of Malta
The second issue of the Quarterly Review for 2005, published by the Central Bank of Malta, analyses economic and financial developments both in Malta and abroad during the first quarter of this year.
In commenting on monetary policy developments, the Review notes that after maintaining an unchanged stance during the first quarter the Bank raised the central intervention rate by 25 basis points to 3.25% in April. The decision was taken in the light of a further decline in the Bank’s external reserves, which, while continuing to reflect a change in consumption patterns following the total liberalisation of trade, was being compounded by strong growth in credit to the personal sector.
The entry of the Maltese lira into ERM II at the beginning of May had a positive impact on financial market sentiment, with the interest rate differential in favour of the Maltese lira increasing and the level of the Bank’s external reserves stabilising. Consequently, the Bank left the central intervention rate unchanged during the remainder of the second quarter.
In its assessment of the monetary sector, the Review notes that monetary growth remained weak during the first quarter, partly reflecting shifts from bank deposits into alternative assets, although the running down of deposits for consumption purposes may also have contributed. Domestic credit continued to increase during the quarter, driven mainly by growth in loans to the private sector, but the net foreign assets of the banking system contracted further.
Meanwhile short-term interest rates and yields on longer-term bonds remained stable over this period. In the equity market, the MSE share index rose, reflecting broad-based investor interest. In April money market rates moved up in tandem with official rates. The Review notes that the economy contracted marginally during the first three months of 2005, following two consecutive quarters of growth, reflecting weak export activity, particularly in the electronics sector. The tourism sector, too, failed to provide a significant boost to growth.
Nevertheless, some improvement was reported in the labour market, with higher employment and a decline in both the unemployment rate and the number of those registering for work. Although the rising trend in the official inflation rate moderated, upward pressures on prices persisted, as developments in international oil prices affected fuel costs and, more indirectly, utility prices. The Bank’s latest business perception survey suggests a possible improvement in economic conditions for the rest of the year.
Turning to the balance of payments, the Review highlights the continued widening of the current account deficit in the first quarter of 2005, when compared to the same quarter of 2004. This was the result of a larger merchandise trade gap, which outweighed positive balances on the services and income components. After excluding movements in the official reserves, the surplus on the capital and financial account registered an increase over the first quarter.
The Review also observes that during the first quarter, the Maltese lira appreciated against the euro and the Japanese yen but lost ground against the US dollar and the pound sterling. In the month prior to its participation in ERM II on May 2, when it was fixed at a level of Lm0.4293 against the euro, the Maltese lira gained further ground against the European unit. At the same time it continued to depreciate steadily against both the dollar and the pound.
Commenting on fiscal developments, the Review reports that during the first quarter the deficit on the Consolidated Fund was larger than in the same period last year as an increase in expenditure exceeded a rise in revenue. Factors contributing to this widening were the new expenditure commitments related to EU membership as well as the removal of the remaining duties on EU products.
