Interest rates raised

The Central Bank of yesterday raised the central intervention rate by 25 basis points to four per cent.

The decision was taken by the Bank Governor at the end of the Monetary Policy Advisory Council meeting held in the morning.

The 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.

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.

In its deliberations, the council reviewed the latest economic data, which suggested that the recovery in economic activity is ongoing. This was reflected in a further improvement in export performance, in employment growth and in a broader-based expansion of credit to the private sector, in a low-inflation environment.

This notwithstanding, the Governor stressed the importance of consolidating the recovery through further measures to enhance the economy's international competitiveness.

The council meets again on February 26.