29 March 2006

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Business Today

Central Bank leaves interest rates unchanged for the time being

The Central Bank yesterday left the central intervention rate unchanged at 3.25% but also expressed its concern that GDP growth was driven by domestic demand with the external sector posting a negative contribution.
The decision to leave interest rates unchanged was taken by the Governor at the end of the Monetary Policy Advisory Council meeting held yesterday.
The Governor concluded that, on the basis of the information presented to the Council, the current level of official interest rates remained appropriate. After a small increase in February, the Bank’s external reserves declined in March, partly reflecting seasonal factors, but also as a result of strong demand for foreign exchange mainly in connection with oil imports.
Domestic financial market conditions were stable, as evidenced by the over-subscription of Government bonds issued on the primary market. Both short-term and long-term interest rate differentials on the Maltese lira, however, narrowed in March largely because euro area yields rose.
“Looking ahead, therefore, the prospect of further increases in interest rates abroad may necessitate a reassessment of the existing monetary policy stance,” the Central Bank said.
The Council also reviewed the latest economic data, including the GDP outcome for 2005 and, with the exception of tourism, the improvement in business sentiment. The incipient recovery in exports observed at the end of 2005 continued in January, while inflation remained moderate and labour market data showed stability in both employment and unemployment rates.
The Council expressed concerns, however, that GDP growth was driven by domestic demand, with the external sector posting a negative contribution.
“The widening of the current account deficit, in turn, would indicate an excess of consumption. These concerns will also have to be taken into consideration as the Council reviews the monetary policy stance going forward,” the Bank said.
The Monetary Policy Advisory Council is due to meet again on 26 April 2006.

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