22/11/2024 20:30:00

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

Mr Alexander Demarco, Acting Governor of the Central Bank of Malta, gave an address at the annual dinner of the Institute of Financial Services for Malta. He began by stating that the broadening decline in inflation worldwide prompted key central banks to start scaling back the degree of tightness in monetary policy.

Euro area inflation has also come down. Against this background, the European Central Bank (ECB) began to cut its policy rates in June this year. Nevertheless, "At the current level, the monetary policy stance remains restrictive" and "there is still room for the Governing Council to cut rates further."

Inflation has also moderated in Malta, despite continued strong economic growth. Nevertheless, "there are reasons to be cautious in the degree of optimism." Economic prospects remain sensitive to ongoing geopolitical tensions and trade fragmentation, and the transition to a greener economy. Local factors, such as productivity and the ability of corporate profits to absorb wage increases, also matter. Furthermore, although the fiscal deficit is narrowing towards 3% of GDP and the government debt-to-GDP ratio remains below 60%, fiscal consolidation could be bolder.

Acting Governor Mr Alexander Demarco

Photo: Pierre Sammut

Malta's financial stability has strengthened amid favourable macroeconomic conditions, with banks showing solid capital and liquidity levels. Banks' profitability has risen, driven by increased net interest income, alongside high credit demand particularly for real estate activities. However, further concentration on real estate heightens systemic risk. The Bank is closely monitoring these developments and stands ready to adjust its policy instruments accordingly.

The financial services landscape is also evolving outside traditional banking, as non-bank financial institutions and fintech firms expand. To address these emerging risks, European regulators are considering extending macroprudential measures for this segment. However, the Acting Governor emphasised that practitioners remain the first line of defence.

Mr Demarco also remarked that the Maltese capital market could play a significant role in funding the evolving needs of local firms. Building investor trust is essential, which can be achieved by enhancing regulatory frameworks. Introducing debt issuer ratings and requiring sinking funds, especially in the rollover and refinancing of debt, would also help. As Malta transitions to a green economy, both banks and capital markets will need to embrace sustainable finance mechanisms.

The Acting Governor concluded his statement by noting that "Malta stands well-positioned for steady growth but should not remain complacent." He added, however, that while fiscal discipline and safeguarding resilience of the financial sector will be crucial to sustain economic stability, economic agents, including policymakers, will need to focus on productivity and innovation, which are ultimately the real source of sustainable economic growth and better living standards.

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