The Malta Independent 28 October 2016, Friday

Updated: January inflation expected at 1% as optimum rate as well as dangers of deflation debated

Tuesday, 16 February 2016, 19:03 Last update: about 9 months ago

Question time in parliament tonight largely turned into a 30 minute mini-debate about the optimum rate of inflation which would benefit the local economy, as well as the drawbacks of high inflation and the dangers of deflation.

The average man in the street would probably shrug his shoulders at what was being said, but the reality is that inflation is an essential tool to manage a growing economy. The issue was kick started by a question put to Finance Minister Edward Scicluna by government MP Anthony Agius Decelis, who asked what the rate of inflation is expected to be. Prof Scicluna said that decades ago, Malta had inflation rates of up to 12-14% which were obviously not beneficial to anyone. Successive governments had worked to bring this down and the last annual figure was of about 1%. He said that figures to be released tomorrow are expected to show no change. "The optimum rate, both in theory and in practice is of 2%." He said that in 2014, there were certain quarters which showed a rate of just above 0%, adding that there was fear that Malta could slide into deflation, due to many factors including the fallout from the financial crisis.

"The financial crisis affected the world economy and recession was experienced across the whole globe. The world almost went into deflation, a recession so bad that prices dropped, which while on the surface might seem like a good thing, it is actually not. Economies sag and governments cannot get their debts down. All the tools at your disposal, no longer work," he said.

He gave the example of Japan, which went from the world's leading economy to one in recession with severe deflation. "The EU was sliding towards that state. As a result, the European Central Bank introduced Quantative Easing, which in effect means pumping massive amounts of money - billions - into economies as a stimulus. We even have a situation where we saw negative interest rates," he said.

He also explained that inflation in Malta largely depends on imports, although there is also a domestic effect.

Opposition MP Tonio Fenech also chipped in with a supplementary question, asking how negative interest was working for Malta. "It is creating a problem where people do not know where to deposit their money if they want to save. Low and negative interest rates are intended to stimulate the economy, but I don't think that is the reality here. Do they have to be so low? At present the only safe bet is to invest in property," he said.

He also asked why the rates have to be so low on government bonds, stocks and treasury bills. "They were the best option for Maltese investors in the past, but not anymore," he said.

Prof Scicluna replied: "It is true that the rates are historically low for Malta, but they are not low compared to other countries. It's two sides of the same coin. Some say that rates are too high to borrow, but others will say that rates are then good to save."

Mr Fenech, who was Finance Minister in the last administration, added another comment. "What saved us in the financial crisis was that the government owed money to Maltese people, not foreign institutions. People do not know where to save their money. I cannot tell people not to invest abroad, but what if all their money goes there with all the risks that would bring?" he concluded.

Prof Scicluna said he was sure that the Maltese people would have faith in the Maltese system as they had in the past, but he said that preference with 'safe' investments needed to go to pensioners, who used the system to safeguard their savings and build on them.

Cost of living making it difficult for vulnerable people - Azzopardi

Opposition MP Jason Azzopardi raised the issue of cost of living again in the plenary session, saying that the government was ensuring that the cost of living is too high for people in vulnerable living conditions to make ends meet.

He said a young deliveryman shared his opinions about the cost of living which has risen over the last two years. He said the person in question said essential products are the most affected by the rise in prices making life very difficult for young workers, single mother, pensioners and other people in vulnerable situations.

The unnamed young worker’s comment ended with, “Today the work ‘worker’ is no longer used by this government.” He also added that the young workforce is seeing the people closest to the government profiting endlessly which the young and the pensioners are suffering from low increases in wages and an increasingly higher cost of living.

Another experience mentioned during the speech was that of a cleaner working in a school that has a contract with the Department of Education which she needs to renew every three months for a pay of €4.20 an hour. This is a situation of precarious work which was said to have been tackled by Prime Minister Joseph Muscat two weeks ago.

Dr Azzopardi quoted the Prime Minister who, in May 2012, spoke against workers in precarious conditions stating that companies will not be allowed to do so under a PL government. In 2014, Dr Muscat also stated that “The government has tackled precarious employment and companies who do so will not benefit from government contracts”.

This, according to Dr Azzopardi, was a lie. MP Azzopardi went on to quote the Eurostat figures published on 19 January which show that Malta had the second highest cost of living in the EU in December and the highest in November and the five preceding months.

The PN MP also referred to NSO statistics published on 21 January, namely the Retail Price Index, saying that the rising food prices are almost triple the cost of all products. Costs of products in general rose by 1.04%, while the cost of food specifically rose by 2.63% throughout 2015.

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