The Central Bank of Malta has reduced the central intervention rate by 25 basis points to four per cent with immediate effect. The Governor took the decision at the end of the Monetary Policy Advisory Council (MPAC) meeting held on Friday morning.

The Governor explained that the reduction in the central intervention rate completes the process of convergence of official interest rates in Malta with those of the euro area. He recalled that under Malta’s existing fixed exchange rate regime, the central intervention rate embodied a premium to compensate investors for exchange rate risk.

With the adoption of the euro on Tuesday, this risk and the consequent premium on official short-term interest rates will disappear. Hence, at its new level of four per cent the central intervention rate is identical to the minimum bid rate on the main refinancing operations set by the European Central Bank.

The Governor expected the latter rate to serve as the benchmark interest rate in Malta once the euro becomes the national currency, influencing domestic money market rates as well as bank deposit and lending rates.

The overnight deposit and lending rates set by the Central Bank of Malta, which are currently linked to the central intervention rate, will also be replaced by the respective interest rates set by the ECB on similar instruments, that is the overnight deposit facility and the marginal lending facility.