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The Bank’s monetary policy stance has remained unchanged during the fourth quarter of 2004 and the first quarter of 2005. On April 8, however, the Bank tightened its stance slightly when it raised the central intervention rate by 25 basis points to 3.25%. Monetary trends were characterised by a contraction in broad money during the final quarter of 2004 as investors continued to show a preference for non-monetary assets, including government bonds. As for the counterparts to broad money, the pace of domestic credit expansion moderated, in spite of increased lending for house purchases, while the net foreign assets of the banking system declined. The Bank’s net foreign assets, in particular, contracted during this period as the usual seasonal currency outflows were augmented by increased payments for oil and consumer goods, the latter reflecting the shift in consumption patterns following the complete liberalisation of trade earlier in the year.
Broad money recovered during January and February 2005 as further growth in domestic credit outweighed a drop in the net foreign assets of the banking system. Domestic money market interest rates remained stable throughout the fourth quarter of 2004 and up till February 2005. With money market rates abroad rising slightly during this period, the premium on Maltese lira short-term interest rates narrowed marginally to 33 basis points. In contrast, the ten-year premium on the Maltese lira widened further, to around 80 basis points, reflecting stability in domestic government bond yields and lower long-term yields abroad.
Economic growth picked up during the final quarter of 2004, with real GDP expanding by 2.3% when compared with the same quarter of the previous year. This was mainly due to inventory accumulation, although consumption and investment also contributed. Economic expansion was, however, dampened by a deterioration in the external balance on goods and services, as imports increased faster than exports in real terms.
The Bank’s business perceptions survey, conducted in January and February 2005, indicates that the negative sentiment in evidence during the second half of 2004 persisted, albeit to a lesser degree, with half of the respondents expecting no major turnaround in economic activity in the following six months, while the number of pessimistic responses was lower than in the previous survey. The survey results suggest that during the December quarter, the level of activity in the export sector was unchanged, while the performance of the locally-oriented sectors was mixed.
According to the Labour Force Survey, the labour force contracted on a year-on-year basis during the fourth quarter of 2004, as a rise in employment was more than offset by a drop in the number of registered unemployed. At the same time, both the twelve-month moving average and the year-on-year rate of inflation edged slightly upwards, as higher transport and communications costs outweighed a decline in food prices and in the prices of clothing & footwear.
Turning to the balance of payments and exchange rate developments, the Central Bank’s review observes that the current account deficit widened during the fourth quarter of 2004, reflecting both a wider merchandise trade gap and a smaller surplus on the services account. Furthermore, data for 2005 indicate a further widening in the merchandise trade gap in January and February. Meanwhile, the Maltese lira exchange rate lost ground against the euro but strengthened against the US dollar, sterling and the Japanese yen during the December quarter. Going into 2005, however, these trends were partly reversed, with the lira falling against the dollar and strengthening marginally against the euro.
Commenting on fiscal conditions, the Review notes that the balance on the Consolidated Fund swung into surplus during the final quarter of 2004, with revenue, boosted mainly by grants and VAT receipts, being higher than expenditure. Likewise, over the year as a whole, the deficit on the Consolidated Fund narrowed. Moreover, the general Government deficit, which gives a more comprehensive picture of the fiscal position, contracted markedly over the year from 10.6 % of GDP to 5.2 %, although this was in large part due to a one-off adjustment related to the restructuring of the shipyards in 2003.
The first issue of the Quarterly Review for 2005 is available on the website of the Central Bank of Malta at www.centralbankmalta.com |
