Central Bank sees improved financial market sentiment

Malta's entry into ERM II on May 2 and the commitment of the monetary authorities to maintain the exchange rate for the lira against the euro at the agreed central parity rate had proved to be a stabilising factor, the Central Bank said yesterday.

"Financial market sentiment improved during May and this was reflected in part in the unchanged level of the external reserves of the Central Bank of Malta. At the same time, the higher interest rate differential in favour of the Maltese lira resulting from the removal of the pound sterling and the US dollar - which carried relatively high interest rates - from the currency basket upon ERM II entry, highlighted the attractiveness of Maltese lira assets, as was evidenced by the strong demand for the two government bonds issued during the month."

The bank said that its Monetary Policy Advisory Council met yesterday morning and the governor, Michael C. Bonello, decided to leave the central intervention rate unchanged at 3.25 per cent.

"The governor considered that the current level of official interest rates provided adequate support to the exchange rate."

Assessing recent economic data, the governor said it was too early to draw conclusions about activity levels but the latest labour market data appeared to confirm earlier impressions of a gradual improvement.

"On the other hand, the current slowdown in some major European economies and the pressures being faced by the electronic components industry could affect Malta's growth prospects negatively this year. Evidence from the domestic industrial and tourism sectors seemed to confirm this uncertainty. The persistence of a relatively high level of inflation, particularly of its domestic component, was an added cause for concern. The growth of lending to the personal sector, though appearing to have eased somewhat, also required close monitoring."

In the governor's view, these developments emphasised the need for the government to vigorously pursue its fiscal objectives and to press ahead with structural reforms. This was essential to endow the economy with the necessary flexibility to become more internationally competitive and thus enable it to overcome the challenge posed by increasingly price-conscious export markets.

The Monetary Policy Advisory Council meets again on June 23.