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The Central Bank of Malta has published the first issue of its Quarterly Review for 2007, which analyses economic and financial developments both in Malta and abroad during the fourth quarter of 2006.
In commenting on the Bank’s monetary policy stance, the Review notes that the Bank raised the central intervention rate by 25 basis points on two occasions: in October 2006 and in January 2007, bringing the rate up to 4%. These decisions were taken against a background of narrowing interest rate differentials in favour of the Maltese lira, expectations of further rate increases in the euro area and a persistent decline in the Bank’s external reserves. They were also supportive of the Bank’s policy of maintaining the euro / Maltese lira rate unchanged from its central parity rate within ERM II of Lm0.4293.
As a result of the increase in the central intervention rate, Maltese money market interest rates rose during the fourth quarter of 2006, leading to a widening of the short-term premium on the Maltese lira. In the following quarter, however, euro area rates increased and even though domestic interest rates continued to rise, the premium narrowed to below 40 basis points by end-March.
In its assessment of monetary developments, the Review observes that in the December quarter the annual growth rate of broad money extended the upward trend evident earlier in the year. Narrow money contracted as currency in circulation fell against a backdrop of rising interest rates and the build-up of euro denominated financial assets by the private sector in anticipation of the euro changeover targeted for January 2008. Domestic credit expanded at a faster pace, fuelled mostly by lending to the private sector, particularly households, whereas the net foreign assets of the banking system contracted.
The Review then focuses on output trends. In the December quarter, real GDP rose by 3.1% on a year earlier, taking the growth rate for 2006 as a whole to 2.9%. Growth during the quarter was driven mainly by a rise in net exports and, to a lesser degree, by higher consumption. In contrast, gross fixed capital formation declined. In the tourism sector, arrivals and expenditure fell over the fourth quarter as a whole, despite a recovery in the last two months that extended into the early months of 2007.
Labour market conditions remained positive, with the Labour Force Survey showing an increase in private sector employment that outweighed a decline in public employment. This contributed to a reduction in the unemployment rate to 6.7% in the quarter reviewed, from 7.0% in the fourth quarter of 2005.
Inflation decelerated considerably during the fourth quarter, with the inflation rate based on the HICP twelve-month moving average easing from a peak of 3.2% in September to 2.6% in December. Lower energy prices were a major factor behind the decline.
Turning to the balance of payments, the Review observes that the deficit on the current account almost halved in the fourth quarter of 2006 when compared to the corresponding period in the previous year. This reflected a narrower merchandise trade gap and higher net inflows on the income account, which together outweighed lower net receipts from transfers and services. After excluding movements in international reserves, net inflows on the capital and financial account increased on a year earlier.
The Maltese lira remained stable in ERM II against the euro throughout the final quarter of 2006. Moving in line with the euro, the lira appreciated against both the US dollar and the Japanese yen, but lost ground against the pound sterling.
The Review observes that further progress was made in fiscal consolidation. The general government deficit narrowed from 3.1% of GDP in 2005 to 2.6% in 2006. Higher tax receipts boosted revenue, which rose at a faster pace than expenditure.
The first issue of the Quarterly Review for 2007 is available on the website of the Central Bank of Malta at www.centralbankmalta.com. |
