06 June 2007


The Web
Business Today

Malta Today

illum

 




The euro adoption - Q & A part 3

Interview with C.J. Farrugia, Executive Director and Head of Corporate Investment and Markets, HSBC Bank Malta p.l.c.

How did the euro base rate fluctuate when compared to the MTL Central Intervention Rate?
On the introduction of the euro on 1st January, 1999, the euro base rate which is referred to as the Main Refinancing Operations (MRO), was three per cent and reached a peak of 4.75 per cent in October 2000. The MRO rate fell again and reached its lowest level of two per cent in June 2003. As at March 2007, the rate is at 3.75 per cent.
Contrarily, the MTL Central Intervention Rate went in one direction, lower. From a peak of 5.5 percent on the introduction of the euro in 1999, it fell to its lowest level of three per cent in September 2003. Since then, the one per cent interest rate differential between the MTL and the euro official rates was gradually lowered to a half per cent margin and is expected to converge fully by January 2008 when Malta adopts the euro.

The graph shows the higher volatility of the Euro rates compared to the more stable MTL rates up to 2003. MTL rates started converging to the ECB rates with the entry of MTL to the ERM II in May 2004.

Since the introduction of the euro in 1999, how did the euro and the Maltese lira currencies perform, when compared to the major foreign currencies?
On the introduction of the euro in 1999, the Maltese lira was made up of a basket of currencies (Sterling, US dollar and euro), the bulk of which was in the euro currency. Since May 2005, the Maltese lira has been 100 percent pegged to the euro. This fact is reflected in the above graph, where the movements of the EUR / GBP are generally mirrored in the MTL / GBP performance particularly during the last two years.

The EUR/USD exchange rate was more volatile between 1999 and 2003, where the lowest level of 0.8285 was reached in October 2000 and the life time high level of 1.3650 attained in December 2004, a staggering 64.75 % volatility in the EUR/USD exchange rate. During the same period, the MTL/USD graph indicates that the highest/lowest levels were reached at the same dates, with the lowest level recorded at 2.1280 and the highest level at 3.1340.

Will the MIBID/MIBOR rates continue to be quoted by the local banking sector on adoption of the euro?
The official interbank rates for the Maltese Lira, referred to as MIBID / MIBOR (Malta Interbank Bid/Offered Rate), provide an interest reference rate for liquidity offered and bid in the Maltese lira money market.
The MIBID/MIBOR quoted by the local banks and fixed by the Central Bank of Malta on a weekly basis are the rates at which the Maltese Lira funds are quoted in the local interbank money market. On adoption of the euro, these rates will be replaced by the European Interbank Offered/Bid Rate referred to as EURIBOR/ EURIBID. Henceforth, HSBC Bank Malta will base both its deposit and loan rates on the EURIBOR/EURIBID rates.

Can one elaborate on EURIBOR/EURIBID rates?
Euribor/Euribid are the acronyms for euro interbank offered/bid rates, which were introduced upon the introduction of the euro on 1 January 1999. These are the interest rates at which banks are willing to lend / borrow funds in euro to / from other banks.
The Euribor/Euribid are calculated daily for interbank deposits/loans with a maturity ranging between one week and twelve months at the average of the daily offer/bid rates of a representative panel of prime banks, rounded to three decimal places. The Euribor/Euribid replaced various national reference interest rates in the money market of the countries that have adopted the euro and the same will happen in Malta.

On conversion of MTL into euro, will interest rates applicable on existing MTL term deposit accounts/Malta Government Stocks change?
As we start to approach euro day, the Central Bank of Malta will gradually align its Central Intervention Rate (at present four per cent) closer to the ECB base rate (currently 3.75 per cent). In turn, the local banks, will similarly align and start quoting the interest rates for both term and demand deposits/loans to the euro rates in line with those on the international money market. However, this will not affect the interest rates on existing Malta Government Stocks/MTL term deposit accounts, which will retain the contracted interest rate applied before 31.12.07 until their maturity date.



Business Today is published weekly on Wednesdays.
Website is updated weekly on Thursdays
Copyright © MediaToday., Malta
Managing Editor - Saviour Balzan

Business Today, MediaToday, Vjal ir-Rihan, San Gwann
Tel: (356) 2138 2741 | Fax: (356) 2138 5075 | E-mail