Malta: Selected Issues
IMF Staff Country Reports, January 29, 2024
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- Malta: Selected Issues
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Bibliographic details
- Published: January 29, 2024
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9798400266690.002
Overview of findings
- The paper examines pass-through dynamics from monetary policy interest rates to retail bank interest rates in Malta, in comparison with other euro area countries.
- Since the European Central Bank started a tightening cycle in July 2022, the pass-through to both deposit and lending rates in Malta has been relatively limited.
- The limited pass-through is attributed predominantly to abundant liquidity and the structure of the banking system, aligning with historical patterns.
Empirical analysis and drivers
- Empirical results suggest various banking sector characteristics play an important role in moderating the pass-through effect of policy rates.
- The pace of monetary transmission in Malta has been much slower compared to other euro area countries.
- Abundant liquidity in the banking system is identified as a key factor reducing the sensitivity of retail rates to policy rate changes.
- Banking system structure (including features captured by the empirical analysis) is highlighted as a persistent determinant of weaker pass-through.
Monetary transmission and policy implications
- Taking into account the weak interest rate channel, the Central Bank of Malta estimated that the direct impact from rising rates on economic activity and inflation would be quite limited.
- Policy recommendation: Given the weak interest rate channel, fiscal policy should play an important role in macroeconomic stabilization.
- The slow pace of transmission has potentially important implications for both monetary and fiscal policymakers when designing stabilization strategies.
Risks to banking profitability
- Deposit rates have risen faster than lending rates.
- Implication: This divergence could warrant close monitoring of banks’ profitability.
- Particular vulnerability highlighted for banks with a high loan-to-deposit ratio.
Key takeaways
- Limited pass-through since July 2022 driven by abundant liquidity and banking system structure.
- Banking sector characteristics materially moderate policy-rate pass-through.
- Slower monetary transmission in Malta relative to other euro area countries implies a larger role for fiscal policy in stabilization.
- Rising deposit rates outpacing lending rates pose profitability risks, especially for banks with high loan-to-deposit ratios.
Source: Malta: Selected Issues
Content in this bundle
- Malta: Selected Issues; IMF Country Report No. 24/34; January 2, 2024