Editorial

When Parliament adopted amendments to the Central Bank of Malta Act in 2002 it balanced the provisions granting the Bank full independence with others designed to increase the Bank's transparency and public accountability. For example, Parliament retained the right to request the Governor to report twice a year on the conduct of monetary policy before a House committee appointed for this purpose. The amended Act also requires the Bank to publish a statement on the decision taken by the Governor at each meeting of the Monetary Policy Advisory Council.

While no ad hoc House committee appears to have been set up so far, the Bank has been explaining its monetary policy decisions since October 2002 by means of a monthly press release. Unfortunately, these explanatory statements do not receive the sort of attention they deserve. This failure could be attributed to the fact that the implications of monetary policy decisions may still not be perceived to be sufficiently far reaching as to merit closer analysis.

Of course such a perception needs to be changed and the resulting information gap bridged, especially at a time when the Maltese economy is becoming more closely integrated with that of the European Union and is preparing to eventually adopt the euro.

It is particularly important to understand what lies behind the decisions to change or retain the level of interest rates in the context of a fixed exchange rate system based on a currency basket. It is equally essential to be aware of the limitations of monetary policy in a system like ours. One major reason among many is that such an understanding makes it easier for individuals and commercial companies to detect advance signals of a possible change in the Bank's policy stance and so be able to act accordingly whether to bring forward or postpone investment or make other decisions of a financial nature.

The statement issued by the Bank after the latest council meeting on July 2 deserves special attention. A careful reading of the text suggests that more important than the reasons the Governor gave for leaving the Bank's central intervention rate unchanged at three per cent was his analysis of the factors that are likely to influence the Bank's decisions in the coming months. At the centre of this analysis is the balance between factors that would strengthen the balance of payments, and, therefore, the Bank's external reserves, and others that would weaken them.

The message appears to be that these factors are currently rather finely balanced. But with interest rates abroad beginning to rise and the domestic economy not showing any signs of staging a broad-based recovery under the prevailing policy framework, much depends on the outcome of the planned fiscal and structural reforms. If these reforms do not boost investor confidence and produce early results in terms of a lower budget deficit and sustainable macroeconomic fundamentals, monetary policy will have to be tightened in order to provide the necessary support to the exchange rate. However, that need not happen. In the prevailing climate, the common good requires all economic actors to ensure that the cost of money does not become more expensive than it needs to be. Agreement on a social pact would be a step in the right direction.