HSBC Malta plc yesterday announced that with the adoption of the euro as from 1 January, it will continue to link its euro base rate to the European Central Bank’s (ECB) reference rate.

The reference rate is the interest rate used by the ECB on the Main Refinancing Operations (MRO), which provide the bulk of the liquidity to the euro area banking system.

The ECB rate currently stands at 4 per cent with a range of 3.95 per cent – 4.05 per cent when the ECB intervenes in the market.

HSBC’s Euro base rate currently stands at 4.10 per cent, which is 10 bp margin over the reference rate. The rationale behind HSBC’s decision to keep euro borrowing costs on commercial, home loans and personal lending linked to the ECB reference rate rather than the three month Euribor, which is widely used in the international markets, was to adopt a less volatile interest rate benchmark – at this time.

Whilst the ECB hiked rates twice in 2007 from 3.50 per cent to the current 4 per cent, the three month Euribor had a year low of 3.64 per cent and has risen to 4.80 per cent as at 30 November 2007. In order not to expose the public and customers to the more volatile and much higher three month Euribor interest rate as a base rate, HSBC has decided that it would be more prudent, in the current market conditions, to link their base rate to the more stable and lower ECB reference rate as Malta goes into the euro.

In time, when the current global credit crisis subsides, it is envisaged that three month Euribor will be less volatile and settle down nearer the ECB reference rate. At that time Maltese corporates, may prefer to price off Euribor.