6 - 12 September 2001

Decrease in interest rates welcomed

by Ivan Brincat

The decision by the Monetary Policy Council to lower the Central Bank’s central intervention rate and the discount rate by 25 basis points to 4.5 per cent has been welcomed by the industry in general.
Speaking to The Malta Business Weekly, the director general of the GRTU Vince Farrugia said the country needs even more cuts in interest rates and added that in the current situation the country’s economy needed further rate cuts to stimulate investment and ease the cost of money.
Last week, after numerous calls for a decrease in interest rates, the Council arrived at a decision after considering international and domestic economic and financial developments within the context of the objectives of the Bank’s monetary policy.
The Council considered the latest developments in the domestic economy saying these were compatible with a limited interest rate cut. There was no evidence of excessive demand pressures, as economy growth was observed to have slowed down in line with international trends, although rising inflation remains a concern.
The government’s commitment to ensure that fiscal targets will be met was also taken into account.
The FOI welcomed the move in the present local and European scenario.
It noted that since the beginning of the year, central banks in other countries have been cutting interest rates in reaction to the pronounced slowdown in global economic activity. As a result, the average interest rate of our trading partners dropped significantly below interest rates in Malta.
The FOI said it viewed the central bank’s move as an encouragement to local banks to improve their credit terms and give benefit of this to serious investors in the productive sectors of the economy.
The lower cost of finance will surely be a welcome boost to their international competitiveness.
Mr Farrugia told The Malta Business Weekly that Malta’s economy could not live on its own. “We depend on the lowering of bank interest rates for competitiveness. Before we used to be worried because of people’s savings and this was deemed by the authorities as a means to safeguard against outflow of funds. But on the other hand it used to make borrowing harder,” he said.
Meanwhile, the Council of the Central Bank said that central banks have been cutting interest rates in the wake of a pronounced slowdown in global economic activity. As a result, the synthetic interest rate, or the average interest rate on the component currencies of the Maltese lira basket dropped significantly below interest rates in Malta.
This has contributed to an easing of pressures on external reserves and the balance of payments. “The cut in official interest rates still leaves Maltese lira interest rates at a level which the Council believes to be compatible with the sustainability of the exchange rate peg.”
The Council said that with regards to the future prospects for the Maltese economy, it reiterated the importance of further consolidation of the fiscal sector and of structural reform to safeguard the economy’s long-term competitiveness. Meanwhile, the Monetary Policy Council will closely monitor developments, with particular attention being paid to interest rate trends abroad, to the external reserves and the balance of payments and to domestic price levels.