The Central Bank of Malta’s second issue of its Quarterly Review for 2010 analyses economic and financial developments both in Malta and abroad during the first quarter of the year and going into the second.
The Review commences with an analysis of the ECB’s monetary policy stance, noting that the bank left official interest rates unchanged throughout the first seven months of 2010 as the governing council expected price developments to remain moderate over the policy-relevant horizon.
In late April and early May, however, concerns over the fiscal situation in some euro area countries led to renewed market tensions. In response, on 10 May, the governing council took several steps to ensure the effectiveness of the monetary policy transmission mechanism. In particular, a Securities Markets Programme was introduced to address the malfunctioning of securities market. Additionally, it decided to conduct a six-month LTRO with full allotment on 12 May and to adopt a fixed-rate tender procedure with full allotment in the three-month LTROs to be allotted on 26 May and 30 June. The ECB also reactivated the temporary liquidity swap lines with the Federal Reserve and resumed US dollar liquidity-providing operations. The Review then focuses on recent international economic and financial developments.
It observes that major industrial economies were generally expanding and emerging market economies recorded rapid growth. Inflationary pressures remained contained, especially in the industrial countries.
The Review also presents the bank’s latest economic forecasts for Malta, which show real GDP expanding by 1.5 per cent in 2010, and then accelerating moderately to 1.8 per cent in 2011. The bank also projects HICP inflation to remain stable, with the annual rate averaging 1.8 per cent in 2010, before edging up to 2.2 per cent in 2011. The bank’s projections are subject to an unusually high degree of uncertainty related to the volatile international environment.
Turning to the performance of the domestic economy, the Review comments that the recovery which began in the last quarter of 2009 gathered momentum in the following quarter, with real GDP rising by 3.4 per cent on a year earlier. Growth was driven by brisk export activity and a strong accumulation of inventories. Conversely, private consumption growth moderated, while government consumption and investment fell further.
As regards price developments, the Review observes that the steady downward trend in the inflation rate was halted in the first quarter of 2010. Annual HICP inflation turned positive, rising from -0.4 per cent in December to 0.6 per cent in March. The increase in inflation was mainly attributed to energy prices, which was, however, partly offset by a decline in prices of unprocessed food. Inflation gained momentum in the following quarter, reaching 1.8 per cent in June.
During the first quarter of 2010, the Harmonised Competitiveness Index (HCI) in both nominal and real terms declined, indicating gains in Malta’s international competitive position. This decline continued into the following quarter. Meanwhile on the fiscal front, the Review notes that in the first quarter of 2010 the general government deficit narrowed on an annual basis, as revenue increased more rapidly than expenditure. However, the general government debt continued to rise, reaching 69.6 per cent at the end of March.
In its policy conclusion the Review draws attention to the importance of fiscal consolidation as the economy strengthens. This will ensure the sustainability of public finances and contain the rise in public debt. In this regard, the Review emphasises that fiscal consolidation based on the reduction in expenditure has a more favourable impact on long-run economic performance than revenue-driven tightening.
The second issue of the Quarterly Review for 2010 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.