The Central Bank of Malta left the central intervention rate unchanged today at 3.25 per cent The decision was taken by the Governor at the end of the Monetary Policy Advisory Council meeting held on Thursday.

The Governor observed that the improvement in financial market sentiment observed in the immediate aftermath of ERM II entry had been sustained. Interest rate differentials vis-à-vis the euro remained unchanged and the bank’s external reserves – which had risen in May – were stable going into June. Thus, at its current level, the central intervention rate provided adequate support to the exchange rate.

The Governor highlighted recent price trends in view of their possible implications for monetary policy. Inflation had risen again in May. Not only did this latest rise contrast with the declining trend of inflation in Malta’s main trading partners, but it also seemed inconsistent with the weak levels of economic activity that were evidenced by the failure of the economy to expand during the first quarter of the year. Rising inflation in these circumstances pointed to rigidities in the setting of prices of goods and services in the domestic market, despite increased openness to international trade, and suggested a need to strengthen efforts to ensure that markets are competitive. Restraining price increases was particularly important, since inflation could otherwise feed into domestic cost structures, which would further erode Malta’s international competitiveness. This consideration gains relevance as the latest data continue to show a negative export performance.

The future conduct of monetary policy would also be influenced by the state of public finances. Fiscal data for the first four months of the year showed no improvement over the comparable period of the previous year, indicating that further efforts would have to be made to achieve the targets set in the Budget for 2005.

The Monetary Policy Advisory Council is due to meet on 28 July 2005.

The Central Bank of Malta left the central intervention rate unchanged at 3.25 per cent yesterday. The decision was taken by the governor at the end of the Monetary Policy Advisory Council meeting held yesterday morning.

The governor pointed out that the bank’s external reserves increased in July and in August to date. These gains partly reflected seasonal factors, but were also a direct response to Malta’s entry into ERM II in May. The premium on the Maltese lira remained unchanged, reflecting stability in domestic and foreign market yields. Against this background, the governor judged that the central intervention rate was at an appropriate level.

On the domestic economic front, international trade statistics for June indicated that the decline in exports was moderating, while import growth was slowing down, despite increased purchases of industrial supplies, which had fallen in each of the previous four months.

In addition, budgetary data pointed to a narrowing of the fiscal deficit during the first half of the year. At the same time, labour market conditions were stable, while price pressures eased, with inflation falling in July. While these developments are positive, any monetary policy response would depend on clear evidence that they were likely to be sustained.

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