24/11/2023 20:32:00

Governor’s address at the Annual Dinner of the Institute of Financial Services Malta

Prof. Edward Scicluna, Governor of the Central Bank of Malta, gave his traditional annual address at the Institute of Financial Services Malta's annual dinner.

The Governor stated that the sudden rise in inflationary pressures prompted the European Central Bank (ECB) to withdraw monetary policy accommodation and initiate a steep rate-hiking cycle, raising ECB key policy rates by 4.5 percentage points as of November 2023.

"Monetary conditions are now firmly in restrictive territory", the Governor said, emphasizing the importance of price stability, which preserves purchasing power and rewards productive work. Stable prices are a necessary condition for sustainable and inclusive economic growth.

The effects of the monetary policy tightening are already evident, with euro area inflation falling to 2.9% in October 2023. Prof. Scicluna argued that, barring exogenous shocks to the global economy, the European Central Bank is on target to achieve its 2% inflation target over the medium term.

Despite the sharp monetary policy tightening, the euro area economy has been relatively resilient, with unemployment rates at historical lows. However, Governor Scicluna noted that a short technical recession within the Euro area remains a possibility.

While the decline in inflation is supported by the resolution of supply chain bottlenecks and the impact of restrictive monetary policy on imported goods and services, Governor Scicluna warned that several domestic factors are pushing in the opposite direction. A dynamic economy buoyed to some extent by subsidies, together with a weak pass-through of tighter monetary policy on bank deposit and lending rates in Malta were singled out as the two main forces delaying the return of inflation to target.

The weak monetary policy pass-through in Malta implies that other policy areas leading to growth become more relevant. Lifting the supply potential of the economy through the efficient allocation of NextGenerationEU funds is key, as is the alignment between monetary and fiscal policies. Macroprudential tools could also be deployed to correct imbalances and reduce risks in banks' portfolios.

Prof. Scicluna concluded his intervention by stating that it would be a mistake to assume that a rate cut is imminent, as international tensions persist and uncertainty prevails. The ECB Governing Council will, nevertheless, ensure that inflation returns to its 2% medium-term target in a timely manner.

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