29 June 2005

The Web

Central Bank Governor expresses concern over rising inflation

The Central Bank of Malta last week left the central intervention rate unchanged at 3.25 per cent but rising inflation prompted the Governor to express concern at the situation.
The Governor observed that the improvement in financial market sentiment observed in the immediate aftermath of ERM II entry had been sustained. Interest rate differentials vis-à-vis the euro remained unchanged and the Bank’s external reserves – which had risen in May – were stable going into June. Thus, at its current level, the central intervention rate provided adequate support to the exchange rate.
The Governor highlighted recent price trends in view of their possible implications for monetary policy. Inflation had risen again in May. Not only did this latest rise contrast with the declining trend of inflation in Malta’s main trading partners, but it also seemed inconsistent with the weak levels of economic activity that were evidenced by the failure of the economy to expand during the first quarter of the year. Rising inflation in these circumstances pointed to rigidities in the setting of prices of goods and services in the domestic market, despite increased openness to international trade, and suggested a need to strengthen efforts to ensure that markets are competitive. Restraining price increases was particularly important since inflation could otherwise feed into domestic cost structures, which would further erode Malta’s international competitiveness. This consideration gains relevance as the latest data continue to show a negative export performance.
The future conduct of monetary policy would also be influenced by the state of public finances. Fiscal data for the first four months of the year showed no improvement over the comparable period of the previous year, indicating that further efforts would have to be made to achieve the targets set in the Budget for 2005.
The Monetary Policy Advisory Council is due to meet on 28 July 2005.

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