20/06/2014

Central Bank of Malta Quarterly Review – First Issue 2014

The Central Bank of Malta has published the first issue of its Quarterly Review for 2014, which analyses economic and financial developments in Malta and abroad during the fourth quarter of 2013, while commenting on further developments in later months. The Review also carries an article on the pass-through from changes in official interest rates to retail bank lending and deposit rates in Malta. This article shows that there is a relatively low pass-through in Malta as compared to other euro area countries.

The Review reports on recent monetary policy decisions taken by the Governing Council of the European Central Bank (ECB). The Council maintained an accommodative monetary policy stance during the final quarter of 2013 and in the first half of 2014. Meanwhile, the Eurosystem continued to implement non-standard measures, aimed at supporting the monetary policy transmission mechanism.

In November 2013 the Council reaffirmed its forward guidance and lowered key interest rates. The rate on the main refinancing operations (MRO) was lowered to 0.25%, while that on the marginal lending rate was reduced to 0.75%. The rate on the deposit facility was left unchanged at zero. This decision reflected weak underlying price pressures in the euro area over the medium term, and subdued monetary and credit dynamics.

The Governing Council adopted a package of monetary policy measures in June 2014 aimed at bringing euro area inflation closer to 2%, while supporting lending in the euro area. The MRO rate was lowered to 0.15%, while rates on the marginal lending facility and on the deposit facility were lowered to 0.40% and -0.10% respectively, with the latter moving into negative territory for the first time. The Governing Council also introduced four-year targeted longer-term operations at fixed interest rates and announced that it will intensify preparations for outright purchases in the market for asset-backed securities.

The Review notes that during the last quarter of 2013, global economic growth was once again underpinned by the advanced economies, led primarily by the United States and the United Kingdom. Economic activity in emerging economies generally moderated, while global inflationary pressures remained contained.

In the euro area, the economy continued to grow at a moderate pace in the final quarter of 2013, with real gross domestic product (GDP) expanding by 0.2% quarter-on-quarter, following a 0.1% increase in the third quarter. Growth was driven by net exports, which offset lower domestic demand.

The annual inflation rate based on the Harmonised Index of Consumer Prices (HICP) dropped to 0.8% in December, from 1.1% in September. Price pressures eased further during the first months of 2014, with the annual inflation rate decelerating further to 0.5% in March before rising to 0.7% in April.

According to ECB staff projections published in March 2014, real GDP in the euro area is expected to expand by 1.2% in 2014 and pick up to 1.5% in 2015 and 1.8% in 2016. The euro area inflation rate is projected to weaken to 1.0% in 2014, before accelerating gradually to 1.3% in 2015 and 1.5% in 2016.

Turning to domestic economic developments, the Maltese economy grew by 2.2% in annual terms during the final quarter of 2013, after having increased by 2.3% in the preceding quarter. Growth was mainly driven by domestic demand, as net exports made a negative contribution.

The Review also carries a supplement on developments in GDP in the first quarter of 2014. In annual terms, real GDP growth accelerated to 3.5%. This acceleration mainly reflected developments in government consumption and investment.

Consumer price inflation picked up in the last quarter of 2013 and in the first quarter of 2014, although from low levels. The HICP inflation rate rose to 1.0% in December from 0.6% in September, owing to increases in the prices of services, non-energy industrialised goods and processed food. The annual inflation rate accelerated further to 1.4% in March before declining to 0.5% in April, partly due to the impact of a reduction in energy tariffs for consumers.

According to the Labour Force Survey (LFS), employment rose by 2.8% in the fourth quarter of 2013, following a 3.1% increase in the previous three-month period. Employment and Training Corporation data also indicate a strong increase in the number of job holders. Meanwhile, the LFS unemployment rate stood at 6.4%, 0.3 percentage point lower compared with the previous quarter and 0.1 percentage point less than a year earlier.

In the external sector, in the last quarter of 2013, the current account of the balance of payments posted a deficit, compared with a surplus in the corresponding period of 2012. This was driven by a widening in the merchandise trade deficit and higher net outflows on the income account. Meanwhile, net inward current transfers increased, whereas the surplus on the services account remained broadly unchanged. Over the year as a whole, the current account surplus stood at 1.4% of GDP, as against 2.0% in 2012.

Monetary developments during the first quarter of 2014 were characterised by further growth in deposits and slower credit growth. The annual growth rate of deposits held by Maltese residents with resident credit institutions rose to 10.3% in March 2014 from 9.1% three month earlier. At the same time the annual rate of growth of credit to residents slowed down to 0.9% in March 2014 from 1.4% in December 2013.

In the first quarter of 2014, yields on three-months Treasury bills fell. In the capital market, yields on five-year government bonds remained stable, while those on ten-year bonds declined. The Malta Stock Exchange (MSE) share index lost ground to stand at 3,424.0 at the end of March.

In its analysis of the fiscal situation, the Review notes that in the fourth quarter of 2013 the general government recorded a surplus as against a deficit a year earlier, as revenue outpaced expenditure. For 2013 as a whole, the deficit-to-GDP ratio narrowed to 2.8% from 3.3% in 2012. The general government debt as a percentage of GDP fell from 76.1% at the end of September to 73.0% at the end of December. However, the debt ratio rose by 2.2 percentage points compared with the end-2012 position.

The Review also presents the Bank's latest economic projections, which were completed in May 2014. Real GDP growth is expected to moderate from 2.4% in 2013, to 2.3% in 2014, before accelerating to 2.6% in 2015. Growth is expected to be driven by domestic demand, particularly private consumption and investment. The average HICP inflation rate is projected to increase marginally from 1.0% in 2013 to 1.1% in 2014 and to pick up further to 1.7% in 2015. Risks to the growth projections are balanced, while those regarding inflation are slightly on the downside.

From a policy perspective, while welcoming the reduction in the deficit-to-GDP ratio to below 3%, the Bank notes that additional measures are needed for the Government to make progress towards a lower debt ratio and to improve the long-term sustainability of public finances.

The Maltese financial system continued to perform satisfactorily in the second half of 2013. Banks' net interest income remained strong reflecting in part the relatively high level of lending rates, particularly those charged to small businesses. At the same time, however, growth in credit to the private sector turned negative. Though a key factor is the reduction of credit to the construction sector, credit to firms in other sectors also declined. Given the banks' robust health, there may be scope to lower bank lending rates, to stimulate credit demand and spur increased investment and economic activity. In fact, a major core bank reduced its base lending rate for business by 0.15%, following the reduction by the ECB of the MRO rate by 0.10%.  It also announced that the savings interest rate will be lowered by 0.05%.

The first issue of the Quarterly Review for 2014 is available on the website of the Central Bank of Malta at www.centralbankmalta.org.

Back to Archive