The Central Bank yesterday announced that interest rates will be retained at their current levels but the announcement came with a stern warning by the Bank’s Governor Michael Bonello who insisted that adjustments in the country’s monetary policy are not enough to address the structural imbalances in the economy.
According to the Governor, monetary policy must be complimented by reforms “aimed at containing costs, including labour-related costs, and for achieving productivity gains.”
One of the structural problems identified by the Governor is the wider trade gap and a weak export performance during the first two months of the year.
The Governor also expressed concern at the relatively high level of domestically generated inflation at a time of subdued economic activity.
The Central Bank of Malta also announced that the central intervention rate will remain unchanged at 3.25%. This decision was taken by the Governor at the end of the Monetary Policy Advisory Council meeting held yesterday morning.
Explaining his decision, the Governor noted that the increase in the central intervention rate on 8 April had been duly transmitted to money market interest rates and to bank deposit and lending rates.
According to the Governor it is still too early to assess the full impact of the decision. On a positive note there are signs that the decline in the Bank’s external reserves had slowed down in April. But according to the Governor, it is unlikely that this is related to the increase in interest rates.
The Governor insisted that the structural factors that prompted the Bank’s recent action to raise interest rates, notably the strong growth in lending to the personal sector and the imbalance between saving and spending, were still present.
According to the same governor it will take more than adjustments in monetary policy to solve these structural problems. But the reforms augured by the Governor depend on government’s resolve to take tough political decisions.