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The Central Bank of Malta’s Annual Report 2014

The Central Bank of Malta has just released its Annual Report for 2014. The Report reviews the Bank's policies and operations during the year and includes detailed financial statements. An opening statement by the Governor is followed by an analysis of economic and financial developments in Malta and abroad. The Report also carries an article on Maltese payment habits, and includes contributions on wage and price setting in Malta, the changing structure of the local economy and firms' access to finance.

The Report observes that the global economy showed resilience throughout 2014, though the pace of recovery differed across the major economies. The euro area returned to positive growth, as GDP rose by 0.9%, compared with a decline of 0.5% in 2013. Still, the recovery in the euro area remains weak compared with other advanced economies.

Inflation in the euro area turned negative towards the end of 2014, standing at -0.2% in December. This disinflationary trend was driven by lower energy prices, although inflation excluding energy also declined. With oil prices declining and against the backdrop of a modest recovery, there is the risk of inflation falling further below the ECB's price stability objective.

In response, the ECB has pursued a more accommodative monetary policy stance, using both conventional and non-standard measures. The ECB lowered key interest rates on two occasions during 2014, taking the interest rate on the main refinancing operations to a historical low of 0.05%. With key interest rates reaching the zero lower bound, the ECB introduced additional non-standard monetary policy measures. The latter have included a conditional commitment by the ECB on the future path of policy interest rates, as well as purchases of asset-backed securities and covered bonds. In addition, the ECB has introduced targeted longer-term funding to banks for new business loans. Furthermore, in January 2015, the ECB announced an extended asset-purchase programme. These new measures demonstrate the ECB's determination to bring the inflation rate closer to 2%. These decisions were taken in response to the subdued outlook for inflation, weak growth momentum in the euro area, and restrained monetary and credit dynamics.

Despite the still uncertain external background, the Maltese economy continued to outperform the euro area, with real GDP growth accelerating to 3.5% in 2014, from 2.7% a year earlier. Domestic demand growth was the main driver behind the expansion in 2014, as private investment, private consumption and government expenditure all increased strongly. The contribution of net exports to growth was slightly negative.

During the first nine months of 2014, employment in Malta was on average 2.2% higher than a year earlier, according to the Labour Force Survey. The unemployment rate averaged 5.9% during this period, half a percentage point below the level in the same period of 2013.

Turning to price developments, the Report notes that the average rate of inflation in Malta, based on the Harmonised Index of Consumer Prices, slowed down from 1.0% in 2013 to 0.8% in 2014. The drop was mainly due to declining energy prices, which reflected the reduction in electricity tariffs, as well as slower growth in food prices.

As regards fiscal developments, the Bank estimates that the general government deficit in 2014 narrowed to 2.2% of GDP, while government debt is estimated to have declined to 68.4% of GDP.

For 2015 and 2016, the Bank projects economic expansion to remain sustained, with real GDP expected to increase by 3.4% and 2.8%, respectively. Growth is set to be driven by domestic demand, particularly private consumption and private investment. The Bank expects inflation to pick up to 1.9% by 2016. The general government deficit is expected to continue to narrow, resulting in a further drop in the government debt-to-GDP ratio.

Turning to the Maltese banking sector, the Report notes that this has contributed to the resilience of the local economy. In terms of bank soundness, Malta ranked 10th place worldwide according to the 2014 World Economic Forum. The Capital Adequacy Ratio of Maltese banks remains well above the 8% regulatory minimum, while funding relies on stable sources. The Maltese banking sector is profitable, with the core domestic banks reporting returns on equity and assets that are significantly better than the EU average.

On the asset side, credit extended by the core domestic banks picked up in 2014, mainly driven by the mortgage market. However, lending rates were higher than in other euro area countries, particularly for SMEs. This is an indication of the incomplete pass-through of accommodative monetary policy measures. However, during 2014 there was a greater degree of responsiveness, as bank lending rates went down modestly. The banks also participated in initiatives to encourage lending to SMEs. The establishment of a development bank would complement the banks' activities by providing further access to finance, especially for SMEs.

Looking ahead, the extended asset purchase programme announced by the ECB should reduce the interest burden of newly issued debt and encourage lending to the private sector on easier terms.

In addition to the benefits of lower borrowing costs, the Maltese economy stands to gain from the ensuing downward pressure on the value of the euro, making the economy more competitive vis-à-vis countries outside the euro area. Still, it is important that accommodative policy measures should not be allowed to distract the authorities from pursuing other determinants of competitiveness, essential structural reforms and the appropriate fiscal consolidation.

Turning to the Bank's operations, as a member of the Eurosystem, through the Governor's participation in the Governing Council of the ECB, and also through the contribution of staff members in various ESCB Committees, the Bank provides input into the formulation of monetary policy in the euro area. The Bank is also responsible for the implementation in Malta of the single monetary policy as determined by the Governing Council.

The Governor's Statement notes that for the purposes of the Bank's contribution to monetary policy decisions and in order to promote an informed policy debate in general, the Bank stands to benefit from an enhanced forecasting and research capacity and from an upgrade of its publications. In 2014, the Bank took a number of steps in this direction, including a reorganisation of resources, an upgraded website and a wider range of analysis and research findings in its publications.

During 2014, the Bank continued to provide input for the ECB's comprehensive assessment, which included a stress-testing exercise. Three local banks were included among the participants in this assessment. The Common Equity Tier 1 ratio of each bank remained above the baseline and adverse thresholds, entailing that they all passed the stress-testing exercise. With the advent of the Single Supervisory Mechanism in November 2014, these banks were placed under the direct supervision of the ECB.

To compensate for the reduction in yields across financial markets, the Central Bank of Malta adopted a more active investment policy. This involved an expansion of its investment assets to €3.8 billion at end-2014, from €3.3 billion a year earlier. While interest income declined, operating profit rose from €66.7 million in 2013 to €71.8 million in 2014. In the light of the enlarged portfolio of investment assets, and within the context of the continuing uncertainty of the financial markets, the Bank enhanced its provisions by a further €15.0 million and also transferred €8.8 million to reserves. Consistent with these augmented buffers, the Bank passed on €48.0 million to the Government of Malta.

The Annual Report 2014 is available on the Central Bank of Malta's website at

The Central Bank of Malta’s Annual Report 2014

The Central Bank of Malta’s Annual Report 2014

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