Tough decisions may be needed to tackle inflation monster, CBM governor says

Tough decisions may be needed to tackle the “inflation monster”, Central Bank governor Edward Scicluna said on Thursday.

“Inflation is likely to remain too high for too long,” he said when he was speaking at the launch of the Central Bank’s annual report for 2022.

“If interest rates need to rise, we will raise them, even if it comes at the cost of the Central Bank’s finances. Our mandate is to fight inflation, not generate profits,” he said.

Scicluna pointed out that Malta’s inflation rate remains lower than that of the euro area, which peaked at 10.6% during 2022.

This reflected higher energy costs and rising food commodity prices. The ECB’s Governing Council took firm decisions by raising interest rates to achieve its inflation objective of 2% over the medium-term.

The transmission of monetary policy on financial markets, including household and firms lending rates, was effective generally throughout the euro area, with the response in Malta being slower. Although inflation rates have peaked, they are still too high and one would expect the ECB to continue with further tightening, the governor said.

Scicluna said that Maltese banks are highly liquid, which has allowed them to limit the impact of inflation, without passing the costs on to their customers.

Commenting on the collapse of Credit Suisse and Silicon

Valley Bank, Scicluna said that things have changed since the financial crisis of 2008 and bankers are no longer looking to government bailouts as a solution.

“We learned the lesson, never again, now it would have to be shareholders not taxpayers who need to resolve the situation,” he said.

The Annual Report for 2022 includes detailed financial statements and an analysis of economic, monetary and financial developments in Malta and abroad.

The launch was attended by officials from credit institutions, diplomats, stockbrokers, economists, social partners and other socio-economic operators. The launch included a Q&A session for the attendees and journalists.

The bank’s chief economist, Aaron Grech, gave an account of economic growth which moderated in 2022 after the strong rebound from the pandemic seen in 2021. Domestic demand, though, remained resilient. Inflation reached unusually high levels last year but is expected to moderate to just above 2% by 2024.

Oliver Bonello, deputy governor for Financial Stability, focused on recent developments in the banking sector. He emphasised the continued resilience of the system which operates with ample liquidity and strong capital buffers. Asset quality and profitability improved but cyclical vulnerabilities persist. These are in turn being addressed by appropriate macro-prudential policy measures.

In his presentation, the deputy governor for Monetary Policy, Alexander Demarco, explained that in view of the bank’s commitment to the price stability objective through interest rate increases during 2022, the Central Bank of Malta, like most other central banks in the Eurosystem, had a contraction in its balance sheet. He also stated that a release from provisions to balance the Profit and Loss Account was required.