No, Governor, you’re wrong

Speaking at the launch of the Central Bank’s Annual Report, the Governor of the Central Bank, Edward Scicluna, boasted that the rate of inflation in Malta is lower than that of the Euro area.

“Facing the humiliation of the end of Air Malta and the cumulative impact of so many exaggerated packages doled out to so many favourites, many times beyond their level of efficiency, and not yet in midterm, the range of options available is quite restricted.”

The Governor was wrong. According to figures published in March, the rate of inflation in Malta was 7.1% while that in the Euro area was 6.9%.

(I am indebted to my friend Joe Zahra for pointing this out).

To be fair, Governor Scicluna could have been speaking in a historic sense: it is true that last year the inflation in Malta was lower than that in the Euro area but since then the inflation in the Euro area has been decreasing while that in Malta has been rising, from 6.8% in January to 7.0% in February and 7.1% in March.

There were many countries in the Euro area that in March registered an inflation lower than Malta’s – Belgium 4.9%, Spain 3.1%, Greece 5.4%, Cyprus 6.1%, The Netherlands 4.5%, Luxembourg 2.9%.

Governor Scicluna also pointed out that “tough decisions may need to be taken to combat the ‘inflation monster’ “adding that “inflation is likely to remain too high for too long”. He hinted that interest rates could be raised, even at the cost of the Central Bank’s finances.

He seemed to be warning local banks from passing on any eventual rate directly to home loan holders, pointing out that Maltese banks are highly liquid and so can limit the impact of inflation without passing the costs on to their customers.

We are still at the very beginning of focusing on this issue even though successive surveys are showing that worries about inflation have become paramount in many people’s minds.

It may be rather reductive to think along these lines but many people are now speculating about the COLA increase to be announced in Autumn and which will come into effect as from next year.

For many people, living from one pension cheque to the next, that may be too far away.

There are others who are worrying too but in a different way. “If the current rate of inflation persists, an increase in COLA of €13 for 2024 will definitely have an adverse effect on many businesses,” Joe Farrugia, director of the Malta Employers Association, told The Times.

He added: “What is even more worrying is that such projections exclude the fact that energy prices are being subsidised. If these subsidies are removed, COLA will exceed the €25 (per week) mark, which would cripple a good number of businesses.”

The danger is that with further pressures to increase the minimum wage, there could be a tsunami of pressures, an unprecedented wage inflation that would impact the competiveness of many companies and fuel further inflation to the detriment of both businesses and consumers.

Local importers have blamed rising shipping costs and overseas inflation for the price increases but many have come to the conclusion that operators have deliberately inflated prices with no justification than that of getting ahead of the inflation curve. The common perception is that there are very few controls in place. Or maybe it’s too late now.

Kept out of the account is how this spiral will impact the government both in its revenue and in its expenditure streams and what the government intends to do about it.

Facing the humiliation of the end of Air Malta and the cumulative impact of so many exaggerated packages doled out to so many favourites, many times beyond their level of efficiency, and not yet in mid-term, the range of options available is quite restricted.

As my initial point said, other countries in the Euro area have managed to bring inflation down. So it can be done. Governor Scicluna should have suggestions to make. The problem is whether the government will accept to bite the bullet. And whether the country, bred on spin and hype, can take what’s coming.