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Central Bank of Malta Quarterly Review – First Issue 2015

The Central Bank of Malta has published the first issue of its Quarterly Review for 2015, which analyses recent economic and financial developments in Malta and abroad and presents the Bank's latest economic projections. Moreover, the Review carries a number of analytical reports on Maltese households' savings; on the work of the ECB's Competitiveness Research Network; on industry-specific multipliers for the Maltese economy; and a recently launched survey assessing local firms' access to finance.

The Governing Council of the European Central Bank (ECB) maintained an accommodative monetary policy stance during the first five months of 2015, as euro area inflation was foreseen to remain less than the target of below, but close to, 2.0% for a protracted period.

The ECB kept the interest rate on the main refinancing operations (MRO) unchanged at 0.05%. The rate on the marginal lending facility and the deposit facility rate remained at 0.30% and -0.20%, respectively. In January 2015, the ECB announced an expansion of its asset purchase programme to include purchases of sovereign bonds in the secondary market.

During the first quarter of 2015, gross domestic product (GDP) in the euro area rose by 0.4% on the previous quarter. Domestic demand drove growth, whereas the contribution from net exports turned negative.

The annual inflation rate in the euro area based on the Harmonised Index of Consumer Prices (HICP) remained negative during the first quarter. In March, it was ‑0.1%, up from -0.2% in December, while by April the annual inflation rate stood at nil. The modest recovery in euro area inflation between December and April mainly reflected developments in food and energy prices.

According to the June Eurosystem staff macroeconomic projections, economic activity in the euro area is expected to recover, with real GDP growth accelerating from 0.9% in 2014 to 2.0% in 2017. The annual inflation rate is expected to decrease marginally from 0.4% in 2014, to 0.3% in 2015, before accelerating to 1.8% by 2017.

The Maltese economy grew at a robust pace in the last quarter of 2014, with real GDP expanding by 4.0% in annual terms. Growth was driven by all major components of domestic demand. However, as exports fell while imports increased, net exports dampened real GDP growth.

The Review also includes a supplement on developments in GDP in the first quarter of 2015. Economic activity remained robust, with real GDP expanding by 4.0% on a year earlier, driven by net exports.

The annual HICP inflation rate in Malta stood at 0.5% in March, up marginally from 0.4% in December. This acceleration was driven mainly by food and non-energy industrial goods prices. In contrast, price pressures eased in the case of services and energy. In April 2015, annual inflation rose further to 1.4%, largely because the electricity tariff cut of April 2014 no longer had an effect on the annual rate.

With regard to the labour market, employment continued to grow, while the unemployment rate maintained its declining trend during the final quarter of 2014. The Labour Force Survey (LFS) showed that employment increased by 1.2% on a year earlier, resulting in a 3.1% increase in the year as a whole. The unemployment rate based on the LFS fell to 5.9% in the last quarter of 2014, from 6.4% a year earlier.

In the external sector, during the final quarter of 2014 the surplus on the current account of the balance of payments widened on a year earlier. In part, the increase reflected a higher surplus on services, whereas the deficit on trade in goods expanded. Over the year as a whole, the current account surplus fell to 2.7% of GDP, from 3.1% in 2013.

Turning to developments in money and credit, residents' deposits with domestic banks continued to increase strongly, posting an annual growth rate of 14.6% in March, the same as in December. Meanwhile, the decline in credit eased. Credit granted to residents fell at an annual rate of 1.1% in March, following a 2.7% drop in the year to December.

Domestic interest rates were strongly affected by declines in euro area interest rates. The yields on three-month Treasury bills fell until March to 0.00%. Those on five-year and ten-year government bonds also declined, to 0.58% and 1.16%, respectively. Furthermore, bank lending rates edged down, with the weighted average interest rate on outstanding loans to resident households and non-financial corporations reaching 3.98% at the end of March.

Moving to fiscal developments, in the last quarter of 2014 the general government surplus increased on a year earlier. This led to an improved fiscal position for the year as a whole, with the general government deficit narrowing to 2.1% of GDP. Meanwhile, the general government debt declined to 68.0% of GDP. Consolidated Fund data show a further improvement in the budget balance during the first four months of 2015.

In its latest economic projections, the Central Bank of Malta expects real GDP growth to accelerate from 3.5% in 2014 to 3.6% this year, before easing to 3.0% in 2016. Growth is expected to be driven by domestic demand. On the other hand, as imports are expected to outpace exports, net exports are set to have a negative impact on GDP growth. HICP inflation in Malta is projected to rise from 0.8% in 2014 to 1.4% in 2015, before reaching 1.8% in 2016. Risks to both GDP growth projections and inflation projections are balanced.

From a policy perspective, the likely abrogation of the Excessive Deficit Procedure for Malta is welcome. However, the fiscal stance should remain oriented towards a progressive narrowing of the fiscal deficit in line with the Government's targets.

The Maltese financial system remains sound, as reflected in continued growth in residents' deposits. Nevertheless, further efforts are needed to diversify sources of funds, raise provisions and reduce exposure to non-performing loans. Taking into consideration the banks' relatively healthy position, there may be scope for increased lending to the private sector.

A more active participation by banks in the ECB's asset purchase programme could also enhance the flow of credit to the domestic economy and diversify the banks' asset holdings. The current accommodative monetary policy stance should lead to lower bank interest rates, while the liquidity received by banks through the programme should be transmitted to the rest of the economy. It remains important to ensure that the private sector, particularly small and medium-sized enterprises, benefits from improved access to finance. The Bank supports institutional reforms in this area, notably the establishment of a development bank.

The first issue of the Quarterly Review for 2015 is available on the website of the Central Bank of Malta.