Interest rates on deposits and loans fell in 2018, Central Bank report shows

Interest rates on both deposits and loans to Maltese residents fell last year, with the spread between the two rates narrowing slightly from elevated levels, the Central Bank’s Annual Report for 2018 indicates.

The report, published on Wednesday, shows that the weighted average deposit rate offered to households and non-financial corporations (NFCs) went down by five basis points to 0.33% by the end of the year.

This was mainly driven by a drop in rates on households’ time deposits, partly offset by higher rates on shorter-term time deposits held by NFCs.

Meanwhile, the weighted average lending rate paid to local monetary financial institutions by households and NFCs fell by 9 basis points, reaching 3.55%. Both households and NFCs paid lower rates, though lending rates to NFCs remained above those charged to households, possibly reflecting differences in credit risk.

The report shows that, in the primary market, domestic yields rose during 2018. Similarly, yields on five-year and ten-year Maltese government bonds increased, contrasting with downward movements in the corresponding euro area yields.

In 2018, net government bond issues were negative. The private sector’s net issues remained positive, but decreased compared with 2017. In the equity market, the Malta Stock Exchange (MSE) Equity price index rose marginally when compared with the level registered at the end of December 2017.

The total assets of domestic MFIs in Malta rose during 2018, contrasting with a drop in the asset holdings of international banks.

Shift to liquid overnight deposits

Meanwhile, Maltese residents’ deposits continued to expand, remaining the main source of funding for resident monetary financial institutions.

The shift away from longer-term deposits towards more liquid overnight deposits persisted, in an environment of low interest rates and robust income growth.

At the same time, growth in credit to residents expanded further, driven by faster growth in loans to the private sector.

Lending to households was supported by a further expansion in mortgage loans, while lending to NFCs recovered following recent weakness.

NFCs also continued to increase their usage of capital markets as an alternative form of financing.

Potential output growth down to 5.7%

The potential output growth of the Maltese economy eased from 7.0% in 2017 to 5.7% in 2018, mainly reflecting a smaller contribution from capital. Nonetheless, it remained high from a historical perspective.

The output surplus is estimated to have widened to 1%, from 0.2% in 2017, but remained well below the most recent high estimated for 2015.

The Bank’s Business Conditions Index (BCI) continued to indicate above-average conditions in 2018, but the index was down marginally from the previous two years.

GDP continued to grow at a fast pace. In 2018 it rose by 6.6%, following a 6.7% increase in 2017. The expansion was largely driven by domestic demand, although the contribution from net exports was also positive.

Nominal gross value added (GVA) data show that the expansion continued to be largely supported by services, although the manufacturing and construction sectors also expanded.

Labour Force Survey (LFS) data for the first three quarters of 2018 shows that – against the backdrop of a buoyant economy – employment continued to rise.

Eurostat data for 2018 indicates that the unemployment rate decreased further and remained well below that in the euro area. It was also lower than the Bank’s estimate of the structural measure.

These favourable labour market developments are corroborated by data based on administrative sources, which show that in 2018 the average number of registered unemployed fell by 653, to 1,847 persons, with the number in December standing even lower, at 1,765.

Annual inflation based on the Harmonised Index of Consumer Prices (HICP) rose to 1.7% in 2018, from 1.3% in 2017. This was similar to the rate registered in the euro area.

In contrast, inflation measured by the Retail Price Index (RPI) eased to 1.2%, from 1.4% in the previous year. These contrasting developments mainly reflected the inclusion of tourist expenditure in the HICP basket.

Meanwhile, domestic cost pressures accelerated further, with the annual average rate of change of the industrial producer price index reaching 4.6% in 2018.

Malta’s harmonised competitiveness indicators (HCIs) continued to indicate a deterioration in international price competitiveness, on account of unfavourable euro exchange rate and relative price movements.

Malta’s unit labour cost (ULC) index registered moderate growth of 0.9% during the year.

Improvement in balance of payments surplus

During the first three quarters of 2018 the surplus on the current account of the balance of payments widened when compared with the corresponding period of 2017. This improvement was primarily attributable to a rise in net services receipts and, to a lesser extent, to lower net outflows related to primary income.

Together, these offset a widening merchandise trade gap and marginally higher net outflows related to secondary income.

Between January and September, net inflows on the capital account increased marginally on a year earlier, while lower net lending was recorded on the financial account.

Net errors and omissions turned negative when compared with the comparable period of 2017. When measured as a four-quarter moving sum, the current account registered a surplus equivalent to 10.6% of GDP, 0.5 percentage points higher than in the year ending in September 2017 and above the 3.3% recorded in the euro area.

The cyclically-adjusted current account balance was also estimated to stand at 10.6% during the period under review.

Government revenue, expenditure up

In the first three quarters of 2018, the general government registered a surplus of €241.4 million, up by €35.2 million compared with the corresponding period of 2017, the report further indicates. This was due to a strong increase in revenue offsetting higher primary expenditure.

Government revenue grew by €257.6 million, or 8.1% in annual terms, reaching €3,445.2 million. Growth in revenue was mainly driven by higher tax receipts.

Government expenditure increased by €222.3 million or 7.5%, due to an increase in both recurrent and capital expenditure items. Outlays on compensation of employees recorded the largest increase in absolute terms, as they rose by €76.7 million.

The stock of general government debt was down by €158.6 million since the end of 2017, standing at €5,512.0 million in September. This was largely due to a €410.7 million decrease in the stock of long-term securities (composed of MGS), whose share in total government debt declined by 4.9 percentage points to reach 82.8%.

Central Bank’s balance sheets continues to expand

Central Bank governor Mario Vella noted in the report that, throughout 2018, the Bank had continued to implement the Eurosystem’s monetary policy decisions in Malta, through standing facilities, liquidity-providing operations and the Public Sector Purchase Programme (PSPP).

Since liquidity remained ample, domestic credit institutions did not participate in the Eurosystem’s main refinancing operations (MROs) and in the long-term refinancing operations (LTROs), Vella said, and, at the same time, recourse to the deposit facility continued to increase.

During the year, the Bank purchased €94.2 million worth of Maltese sovereign bonds through the PSPP, bringing total purchases before amortisation to €1,042.3 million by the end of 2018, he highlighted. In addition, the Bank continued to purchase securities for the ECB’s PSPP) portfolio.

In 2018, the Bank’s balance sheet continued to expand, reaching €8,853.9 million at the end of 2018, from €8,582.9 million a year earlier, the report shows.

Operating profit before transfer to provisions decreased to €38.3 million, from €51.6 million in 2017. This was mainly due to a reduction in net gains on the disposal of financial instruments and a lower amount of income in respect of the remaining balance of Maltese lira fifth series currency notes, which were redeemable until the end of January 2018.

Lower net interest income further contributed to the decline in operating profit.