Assessing monetary developments, the Central Bank of Malta Quarterly Review for the final quarter of last year said the annual growth rate of broad money in the December quarter extended the upward trend evident earlier in the year. Narrow money contracted as currency in circulation fell against a backdrop of rising interest rates and the build-up of euro denominated financial assets by the private sector in anticipation of the euro changeover targeted for January 2008. Domestic credit expanded at a faster pace, fuelled mostly by lending to the private sector, particularly households, whereas the net foreign assets of the banking system contracted.

On output trends the review says that in the December quarter, real GDP rose by 3.1 per cent on a year earlier, taking the growth rate for 2006 as a whole to 2.9 per cent. Growth during the quarter was driven mainly by a rise in net exports and, to a lesser degree, by higher consumption. In contrast, gross fixed capital formation declined. In the tourism sector, arrivals and expenditure fell over the fourth quarter as a whole, despite a recovery in the last two months that extended into the early months of 2007.

Labour market conditions remained positive, with the Labour Force Survey showing an increase in private sector employment that outweighed a decline in public employment. This contributed to a reduction in the unemployment rate to 6.7 per cent in the quarter reviewed, from 7.0 per cent in the fourth quarter of 2005.

Inflation decelerated considerably during the fourth quarter, with the inflation rate based on the HICP 12-month moving average easing from a peak of 3.2 per cent in September to 2.6 per cent in December. Lower energy prices were a major factor behind the decline.

Turning to the balance of payments, the review observes that the deficit on the current account almost halved in the fourth quarter of 2006 when compared to the corresponding period in the previous year. This reflected a narrower merchandise trade gap and higher net inflows on the income account, which together outweighed lower net receipts from transfers and services. After excluding movements in international reserves, net inflows on the capital and financial account increased on a year earlier.

The Quarterly Review is available on the website of the Central Bank of Malta at www.centralbankmalta.com.