Tough decisions may need to be taken to combat the "inflation monster",  Central Bank governor Edward Scicluna has said.

Speaking at the launch of the Central Bank’s 2022 annual report on Thursday, Scicluna warned that “inflation is likely to remain too high for too long”.

“If interest rates need to rise, we will raise them, even if it comes at the cost of the Central Bank’s finances. Our mandate is to fight inflation, not generate profits,” he said.

Nonetheless, Scicluna highlighted that Malta’s inflation rate remains lower than that of the euro area, which peaked at 10.6% during 2022, significantly higher than its declared target of 2%.

NSO data shows that Malta's inflation rate rose to 7% in February.

Scicluna warned that Central Banks need to remain flexible in their decision-making “even if these decisions are interpreted as u-turns” because factors causing unpredictability in the global economy, such as the Ukraine war, remain present.

This comes in the wake of a series of interest hikes carried out by the European Central Bank throughout 2022 which have placed local banks under increasing pressure to raise their own interest rates, with potentially problematic consequences for home loan holders.

Scicluna argued that Maltese banks are highly liquid, which has allowed them to limit the impact of inflation, without passing the costs on to their customers.

Reflecting on the collapse of Credit Suisse and Silicon Valley Bank over the past months, Scicluna said that things have changed since the financial crisis of 2008 and bankers are no longer looking to government bailouts as a solution.

“We learned the lesson, never again, now it would have to be shareholders not taxpayers who need to resolve the situation,” he said.

'Extraordinary economic growth'

Speaking via a pre-recorded video message, the president of the European Central Bank Christine Lagarde praised Malta’s “extraordinary economic growth” over the past decades and congratulated the Central Bank on the “great confidence” it demonstrated throughout the years in transforming Malta into a modern economy.

The meeting was also addressed by the Central Bank’s chief economist, Aaron Grech, who gave an exhaustive breakdown of the performance of Malta’s economy over the past year.

Grech highlighted how Malta’s GDP rose by 7% throughout 2022, lower than previous years but still higher than the euro area average.

According to Grech, this growth was driven by private consumption, with other economic sectors such as manufacturing also growing compared to previous years. The construction industry, on the other hand, showed a slight dip in performance.

Grech warned that Malta’s relatively low inflation rate, driven by the government’s decision to freeze utility prices, has come at the cost of the country’s fiscal performance which was among the best in the euro area before the pandemic but has now plummeted to below-average levels.