Banks raise base rate on deposits

Bank of Valletta and HSBC yesterday announced they will be raising their base rate on deposits and advances by 25 basis points following the decision by the Central Bank to increase the central intervention rate by the same level.

The Central Bank announced the change on Thursday following the Monetary Policy Advisory Council's monthly meeting.

This is the second time in three months that the rate has been raised by 0.25 per cent.

Announcing the raise, Central Bank Governor Michael Bonello observed that at their previous levels, official interest rates were no longer adequately supporting the exchange rate peg.

The decision to raise the rate was taken against the background of a further decline in the bank's external reserves this month and a marked narrowing of interest rate differentials in favour of the lira resulting from rising euro area rates.

Moreover, the Governor remarked that, while the drop in the reserves was partly due to seasonal factors, there was growing evidence of a premature conversion of domestic currency holdings into euro and increased retention of euro-denominated export earnings.

Following the rise in the central intervention rate, it is expected that assets denominated in liri, particularly bank deposits, will become more attractive. Asked by The Times to comment on the decision, economist Edward Scicluna said the move follows the same reasoning the bank had used in November, namely that the Central Bank is trying to safeguard reserves and is taking comfort in the fact that it is not hurting the economy.

"Now, obviously, there are minuses. Young couples taking up loans are a prime example. However, the Central Bank would be looking at the bigger picture," he said.

It is difficult to predict anything at this stage, Prof. Scicluna said, but a higher rate of interest might be sending signals to the property market. The price of property is not only affected by the asking price but also by its servicing, he said.