The Central Bank of Malta has published the first issue of its Quarterly Review for 2008, which analyses economic and financial developments both in Malta and abroad during the fourth quarter of 2007 and the initial period of the current year. This issue of the review also carries a note on the way particular economic and financial indicators relating to Malta will be presented in the bank’s publications following euro adoption.

The bank kept its monetary policy stance unchanged for most of the fourth quarter of 2007. Towards the end of the year, ahead of Malta’s full participation in EMU, the bank lowered the central intervention rate by 25 basis points to four per cent to bring it in line with the minimum bid rate on the main refinancing operations set by the ECB. Hence, the process of convergence of official interest rates with those in the euro area was completed.

Regarding international economic developments, the review notes that growth in the major industrialised economies slowed down in the final quarter of 2007, though emerging market economies continued to expand rapidly. Inflationary pressures increased considerably world-wide under the impact of rising food and energy prices.

Turning to monetary developments in Malta, the review observes that the annual growth rate of broad money continued to decelerate, falling from 12.3% in September to 11.1% in December. Narrow money contracted on a year earlier as currency in circulation fell sharply ahead of the euro changeover. The annual growth rate of domestic credit declined to 10.7% in December, with lending for house purchases remaining the main source of growth.

The review then focuses on the domestic economy and observes that during the fourth quarter of 2007 growth remained robust at 3.7% on a year earlier, slightly below the four per cent growth registered in the September quarter. Economic expansion was supported by a strong build-up in inventories, whereas the external sector contributed negatively. Meanwhile, private consumption rose at a more moderate pace, losing the upward momentum in evidence since the second half of 2006.

Labour market conditions tightened further, with employment continuing to grow, fuelled by job creation in the private services sector. The unemployment rate continued to decline and, at 6.2%, was the lowest for over six years and half a percentage point below the year-ago level.

Meanwhile, inflation as measured by the 12-month moving average HICP rate reached its lowest level in many years in October but edged up at 0.7% by December. In line with international developments, rising food prices and energy costs pushed the annual HICP inflation rate above the three per cent level going into 2008.

The review gives details of the results of the bank’s latest survey on business perceptions in the service and construction industries. This showed a further improvement in the first quarter of 2008, with respondents optimistic as regards the second quarter and firms planning to raise their investment outlays and expand their labour complement in the course of the year. The review also comments on the results of European Commission surveys. These indicated that during the December quarter, consumer sentiment in Malta had improved, while industrial confidence remained positive.

Turning to the developments in the balance of payments, the review notes that the fourth quarter deficit on the current account more than doubled on a year earlier. This mainly reflected a wider merchandise trade gap and higher net outward transfers, which outweighed gains on the services and income components. On the other hand, the capital and financial account recorded a large surplus, propelled by strong net portfolio and other investment inflows. Consequently, reserve assets rose sharply during the quarter.

The Maltese lira remained unchanged at its central parity rate in ERM II of MTL/EUR 0.4293 throughout the fourth quarter. Moving in line with the euro, the lira strengthened further against the US dollar and also appreciated vis-à-vis the pound sterling and the Japanese yen.

In its analysis of fiscal developments, the review reports that a significant surplus was registered in the last quarter of the year, which brought the general government deficit for 2007 down to 1.8% of GDP from 2.5% a year earlier. Although general government debt increased in absolute terms, faster GDP growth led to a reduction in the debt-to-GDP ratio, to 62.6%.

The first issue of the Quarterly Review for 2008 is available from the website of the Central Bank of Malta at www.centralbankmalta.org.