The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2007, which analyses economic and financial developments both in Malta and abroad during the third quarter of 2007 and into the fourth. Additionally, the Review carries a speech delivered by the Governor entitled "Growing the economy in the euro area: a policy prescription" and an article on legal aspects of the euro.

In commenting on the Bank's monetary policy stance, the Review observes that after having kept official interest unchanged since May 2007, on 28 December the Bank aligned its official interest rates with those of the European Central Bank (ECB) in anticipation of the adoption of the euro on 1 January 2008. Thus, the Bank's central intervention rate was lowered by a quarter of a percentage point to 4.0%, in line with the minimum bid rate on the main refinancing operations set by the ECB.

This completed the process of convergence of official interest rates in Malta with those of the euro area. The Review then notes that as from the euro adoption date, the monetary policy stance in Malta is no longer determined by the Central Bank of Malta but by the ECB's Governing Council, of which the Governor is a member. Monetary policy decisions now reflect developments in the euro area as a whole, with the main objective being that of price stability. In recognition of the new arrangements governing monetary policy, the Bank's Monetary Policy Advisory Council was dissolved at the end of December.

Monetary developments in Malta up to November were characterised by robust growth in broad money, which exceeded 11% on a year-on-year basis, boosted by an increased demand for bank deposits with an agreed maturity of up to two years. The downward trend in the narrow money component continued during the period under review, reflecting a decreased demand for cash in the face of the imminent euro changeover. Domestic credit continued to expand rapidly.

Turning to the performance of the domestic economy, the Review comments that economic activity remained robust in the third quarter, with real Gross Domestic Product (GDP) rising by 4.1% on an annual basis. The impetus came mainly from higher private consumption, with government consumption also contributing. On the other hand, although private sector investment increased, gross fixed capital formation declined reflecting the completion of the Mater Dei hospital. Net exports also had a negative impact on growth, as a sharp rise in imports offset a modest expansion in exports.

Conditions in the labour market continued to strengthen. This was reflected in Labour Force Survey data, which showed employment growth in the third quarter slightly above 2% annually. In turn, this was mainly supported by a rise in part-time positions, while full-time employment increased marginally. As a result, the unemployment rate fell further, to 6.2%.

Inflation continued to decline up to October 2007, with the Harmonised Index of Consumer Prices twelve-month moving average inflation rate falling to 0.3%. In November, however, it edged up to 0.5% as the year-on-year inflation rate accelerated to 2.9%. This mainly reflected the stabilisation of hotel accommodation prices, though fuel and food prices exerted further upward pressure on inflation.

The Bank's survey on the perceptions of business operators in the service and construction industries indicated general stability in fourth-quarter performance compared with the previous three months. Over half of the participants reported unchanged turnover, profits, selling prices and costs. The overall outlook for the first quarter of 2008 was generally positive, with the balance of replies on turnover, profits and employment remaining positively skewed, a pattern which has prevailed since the inception of this survey in May 2007.

Focusing next on the balance of payments, the Review notes that during the September quarter, the surplus on the current account increased on a year earlier. This was propelled by a drop in net investment income outflows and a higher surplus on current transfers. After excluding movements in official reserves, moderate net outflows on the capital and financial account were recorded. Reflecting these developments, reserve assets rose during the third quarter.

The Maltese lira remained unchanged at its central parity rate of MTL/EUR 0.4293 in ERM II throughout the third quarter. Mirroring the euro's fluctuations against major currencies, the lira appreciated against the US dollar, rose against the pound sterling but lost ground against the Japanese yen. The lira strengthened further in terms of the US dollar and the pound sterling over October and November, while it edged up marginally against the yen.

As regards fiscal developments, the Review comments that during the first nine months of 2007 the general government deficit expanded on a year earlier as expenditure grew more rapidly than revenue. Likewise, the deficit on the Consolidated Fund widened, albeit marginally, during this period. According to the latest official projections, the general government deficit is expected to have fallen below 2% of GDP in 2007. It is set to continue on a declining trend during the current year. Similarly, the Consolidated Fund deficit is expected to have narrowed in 2007 and to continue falling in 2008.

The fourth issue of the Quarterly Review for 2007 is available for download here.