Central Bank Quarterly Review
from the Central Bank of Malta
The second issue of the Quarterly Review for 2006, published by the Central Bank of Malta, analyses economic and financial developments both in Malta and abroad during the first quarter of 2005.
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 3.50% in May. This decision was taken in the light of an underlying downward trend in the Bank’s external reserves and a further narrowing of the interest rate differential in favour of the Maltese lira. Concerns about the rapid growth in imports of consumer goods and a further acceleration in inflation were also taken into account. The Bank then left the central intervention rate unchanged for the remainder of the second quarter.
Throughout the period under review, the Maltese lira remained at its ERM II central parity rate of MTL/EUR0.4293, in line with the commitment made by the Maltese authorities upon entry into ERM II. The Bank’s external reserves fell during the first quarter, mainly on account of substantial net foreign exchange sales to the rest of the banking system and the transfer of government sinking fund accounts denominated in foreign currency to credit institutions. In May, however, receipts of privatisation proceeds led to a considerable increase in the external reserves.
Domestic money market interest rates remained broadly stable in the first quarter, before rising in May in line with official rates. As a result, the premium on Maltese lira short-term interest rates, which had narrowed due to higher euro area interest rates, widened again in May.
The Malta Stock Exchange share index rose in the first quarter, but equity prices fell in April.
The Review observes that broad money continued to expand, albeit at a slower pace, during the quarter reviewed. Monetary growth was driven by an increase in lending to the private sector, whereas the net foreign assets of the banking system declined. Going into the second quarter, the annual growth rate of broad money remained stable.
Turning to the situation in the real sector, the Review notes that in the first quarter of 2006 the Maltese economy expanded by 3.1%, year-on-year, up from 2.4% in the preceding quarter. Growth was principally driven by domestic demand, largely investment. Exports of goods and services recovered, but their positive impact on growth was outweighed by a strong rise in imports. Nonetheless, the net contribution of the external sector in GDP growth, while remaining negative, declined from -8.5% of in 2005 to -3.0% in the first quarter of 2006. In the manufacturing sector, both turnover and capital expenditure increased over 2005, primarily reflecting an improvement in the semi-conductor business. On the contrary, activity in tourism declined, which may have partly reflected the timing of Easter, which fell in April 2006 as against March in 2005.
The Review then comments on prices and employment. On the former it observes that inflation eased during the first quarter as a result of slower increases in fuel and energy prices. Year-on-year inflation rates computed on the basis of the Retail Prices Index and the Harmonised Index of Consumer Prices fell to 3.1% and 2.9%, respectively in March. In April, however, higher food prices and increased transport costs pushed annual inflation rates up.
On employment developments, the Review notes that according to the Labour Force Survey, the labour force expanded on a year-on-year basis during the first quarter, as both the number of unemployed and the employed increased. The unemployment rate rose to 7.8% from 6.7% in 2005 and from 7.3% in the preceding quarter. Records held by the Employment and Training Corporation show an increase in the number of registered unemployed in January 2006. On this basis, the unemployment rate rose from 5.1% in December to 5.3%, but it remained below the rate recorded in 2005.
On business expectations, the Review observes that the Bank’s latest Business Perceptions Survey, conducted between April and May 2006, showed a marginal improvement in firms’ expectations about the general economic situation over the next six months. In terms of their own performance, firms were expecting higher turnover and improved profitability during the second quarter of 2006.
In commenting on the balance of payments, the Review notes that during the first quarter the current account deficit widened on 2005. This was due to a larger merchandise trade gap and a shift in the balance on the income account from a surplus to a deficit. The deterioration in these components of the current account outweighed the positive impact of an improved position on services and the transfers account. After excluding movements in the official reserves, net inflows on the capital and financial account decreased as a result of lower grant receipts.
Movements of the Maltese lira in the foreign exchange market continued to be conditioned by the Maltese currency’s fixed link to the euro. Thus the lira moved in tandem with the latter against the other major currencies during the survey period. Over the first quarter it appreciated vis-à-vis the US dollar, the pound sterling and the Japanese yen, while going into the second quarter it rose further against the dollar and the yen and remained broadly stable versus sterling.
In its analysis of fiscal developments, the Review reports that during the first quarter the deficit on the Consolidated Fund was slightly lower than in the same quarter of 2005, as growth in revenue exceeded that in expenditure. During the first four months of the year the deficit narrowed by Lm13.4 million.
from the Central Bank of Malta
The second issue of the Quarterly Review for 2006, published by the Central Bank of Malta, analyses economic and financial developments both in Malta and abroad during the first quarter of 2005.
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 3.50% in May. This decision was taken in the light of an underlying downward trend in the Bank’s external reserves and a further narrowing of the interest rate differential in favour of the Maltese lira. Concerns about the rapid growth in imports of consumer goods and a further acceleration in inflation were also taken into account. The Bank then left the central intervention rate unchanged for the remainder of the second quarter.
Throughout the period under review, the Maltese lira remained at its ERM II central parity rate of MTL/EUR0.4293, in line with the commitment made by the Maltese authorities upon entry into ERM II. The Bank’s external reserves fell during the first quarter, mainly on account of substantial net foreign exchange sales to the rest of the banking system and the transfer of government sinking fund accounts denominated in foreign currency to credit institutions. In May, however, receipts of privatisation proceeds led to a considerable increase in the external reserves.
Domestic money market interest rates remained broadly stable in the first quarter, before rising in May in line with official rates. As a result, the premium on Maltese lira short-term interest rates, which had narrowed due to higher euro area interest rates, widened again in May.
The Malta Stock Exchange share index rose in the first quarter, but equity prices fell in April.
The Review observes that broad money continued to expand, albeit at a slower pace, during the quarter reviewed. Monetary growth was driven by an increase in lending to the private sector, whereas the net foreign assets of the banking system declined. Going into the second quarter, the annual growth rate of broad money remained stable.
Turning to the situation in the real sector, the Review notes that in the first quarter of 2006 the Maltese economy expanded by 3.1%, year-on-year, up from 2.4% in the preceding quarter. Growth was principally driven by domestic demand, largely investment. Exports of goods and services recovered, but their positive impact on growth was outweighed by a strong rise in imports. Nonetheless, the net contribution of the external sector in GDP growth, while remaining negative, declined from -8.5% of in 2005 to -3.0% in the first quarter of 2006. In the manufacturing sector, both turnover and capital expenditure increased over 2005, primarily reflecting an improvement in the semi-conductor business. On the contrary, activity in tourism declined, which may have partly reflected the timing of Easter, which fell in April 2006 as against March in 2005.
The Review then comments on prices and employment. On the former it observes that inflation eased during the first quarter as a result of slower increases in fuel and energy prices. Year-on-year inflation rates computed on the basis of the Retail Prices Index and the Harmonised Index of Consumer Prices fell to 3.1% and 2.9%, respectively in March. In April, however, higher food prices and increased transport costs pushed annual inflation rates up.
On employment developments, the Review notes that according to the Labour Force Survey, the labour force expanded on a year-on-year basis during the first quarter, as both the number of unemployed and the employed increased. The unemployment rate rose to 7.8% from 6.7% in 2005 and from 7.3% in the preceding quarter. Records held by the Employment and Training Corporation show an increase in the number of registered unemployed in January 2006. On this basis, the unemployment rate rose from 5.1% in December to 5.3%, but it remained below the rate recorded in 2005.
On business expectations, the Review observes that the Bank’s latest Business Perceptions Survey, conducted between April and May 2006, showed a marginal improvement in firms’ expectations about the general economic situation over the next six months. In terms of their own performance, firms were expecting higher turnover and improved profitability during the second quarter of 2006.
In commenting on the balance of payments, the Review notes that during the first quarter the current account deficit widened on 2005. This was due to a larger merchandise trade gap and a shift in the balance on the income account from a surplus to a deficit. The deterioration in these components of the current account outweighed the positive impact of an improved position on services and the transfers account. After excluding movements in the official reserves, net inflows on the capital and financial account decreased as a result of lower grant receipts.
Movements of the Maltese lira in the foreign exchange market continued to be conditioned by the Maltese currency’s fixed link to the euro. Thus the lira moved in tandem with the latter against the other major currencies during the survey period. Over the first quarter it appreciated vis-à-vis the US dollar, the pound sterling and the Japanese yen, while going into the second quarter it rose further against the dollar and the yen and remained broadly stable versus sterling.
In its analysis of fiscal developments, the Review reports that during the first quarter the deficit on the Consolidated Fund was slightly lower than in the same quarter of 2005, as growth in revenue exceeded that in expenditure. During the first four months of the year the deficit narrowed by Lm13.4 million.
