The governor concluded that official interest rate levels continued to provide sufficient support to the exchange rate peg. The premium on the Maltese lira had remained stable throughout June and the observed decline in the Bank’s external reserves largely reflected a number of special factors, including the higher cost of oil imports. Credit institutions meanwhile continued to be net buyers of foreign exchange from the market.

Looking ahead, the governor identified some factors that would influence the Bank’s monetary policy stance in coming months. He observed that recent evidence of a stronger export performance combined with an improvement in business sentiment could, if it persists, lead to a more favourable current account outcome.

The latest data on inflation and the government’s fiscal position also provided indications that would lend support to the current policy stance. Against this, the governor noted that the incipient upward trend in interest rates abroad and its impact on the Maltese lira premium, and possibly on portfolio investment decisions, would tend to weaken such support. Any departure from the budget deficit target for 2004 contained in the Government’s Convergence Programme 2004-2007 would have a similar effect.

Consequently, the bank would be closely monitoring such domestic and external indicators for any developments that might justify a review of the policy stance so as to ensure continued support for the exchange rate peg.

The Monetary Policy Advisory Council is due to meet again on 29 July.

The Governor considered that there were no pressures on the exchange rate peg and that, therefore, official interest rate levels were appropriate. The bank’s external reserves, which had declined in July, recovered in August and the premium on the Maltese lira increased slightly.

Domestic financial markets were characterised by a positive response to the issue of Government stocks on the primary market and there was no evidence of increased portfolio investment outflows after the removal of the remaining capital controls in May.

Inflation rose in July, reflecting changes in fuel prices and in the indirect tax regime, but core inflation was stable, suggesting that domestic demand remained weak. Expressing concern at the implications of rising international oil prices for the economy, the Governor stressed the need to contain the costs of other inputs so as not to jeopardise the incipient recovery in exports and in economic activity evidenced by the GDP data for the first quarter.

Given the relatively large share of labour costs in the overall price structure, increases in wages should be matched by productivity gains, the Governor concluded.

The Monetary Policy Advisory Council is due to meet again on 29 September.