Malta: Selected Issues

January2024 MALTA SELECTEDISSUES IMFCountryReportNo.24/34 ThisSelectedIssuespaperonMaltawaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJanuary2,2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.org InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund January2,2024 MALTA SELECTEDISSUES PreparedbyMahirBinici(EUR) ApprovedBy EuropeanDepartment CONTENTS INTERESTRATEPASS-THROUGHINMALTA2 A.Introduction2 B.MeasuringthePass-Through4 C.BankingSectorCharacteristics8 D.Conclusions9 FIGURES 1.ECBPolicyRatesandTighteningCycles2 2.RetailRatesinMalta3 3.RetailRatesChangesRelativetoECBPolicyRate5 4.ResponsetoMonetaryPolicyShock:CumulativeIRF7 5.BankingSectorCharacteristicsandPass-Through8 TABLES 1.DepositandLoanRatePass-Through11 2.BankingSectorCharacteristics12 ANNEX I.DepositandLoanRatePass-ThroughinEuroArea16References14 MALTA INTERESTRATEPASS-THROUGHINMALTA1 Thispaperexaminesthepass-throughdynamicsfrommonetarypolicyinterestratestoretailbankinterestratesinMalta,incomparisonwithothereuroareacountries.InMalta,thepass-throughtobothdepositandlendingrateshasbeenrelativelylimitedsincetheEuropeanCentralBank(ECB)startedatighteningcycleinJuly2022.Thiscanbeattributedpredominantlytoabundantliquidityandthestructureofbankingsystem,aligningwithhistoricalpatterns. A.Introduction 1.Inmid-2022,theECBembarkedonthesteepesthikingcycleinthehistoryofthemonetaryunion.Thisinvolvedreducingnetassetpurchases(APP),concludingallAPPsbyJune2022.Followingthis,theECBcommencedaseriesofmonetarypolicyratehikesinJuly2022.FromJuly2022toSeptember2023,theECBincreaseditspolicyratesby450basispoints,representingtheECB’shighestspeedandlargestmagnitudeoftighteningfromahistoricalperspective. 2.Thetransmissionofmonetarypolicytotheeconomyusuallyoccurswithtimelags.Theprimarychannelofthistransmissionisthroughthebankingandfinancialsector,wherethecentralbankinfluencesthecostofmarketborrowingfortheseinstitutions.Consequently,thisaffectslendingratesforconsumersandcorporates,aswellastheinterestreceivedondeposits,ultimatelyshapingspendingandinvestmentdecisions. Figure1.ECBPolicyRatesandTighteningCycles ECB:KeyPolicyRates (Percent) FourTighteningCycles (Mainrefinancingrate,percent) 7 6 5 4 3 2 1 0 -1 5 DepositRate MarginalLendingRate MainRefinancingRateOvernightDeposits 4 3 2 2000s Pre-GFC Post-COVID Post-GFC 1 0 1 11 21 31 1999m102003m102007m102011m102015m102019m102023m10NumberofMonths Sources:ECBDataPortalandIMFstaffcalculations. Note.Tighteningcycledefinedbythenumberofmonthsoverthefirsteventofpolicyrateincreasetothelastevent. 1PreparedbyMahirBinici.UsefulcommentswerereceivedfromparticipantsinseminarheldattheCentralBankofMalta. 2INTERNATIONALMONETARYFUND MALTA 3.DespitethesharpincreaseinECBmonetarypolicyrates,theriseinretailbankinterestratesinMaltahasbeenlimitedcomparedtoothereuroareacountries.Ondeposits,depositrateswithagreedmaturityforhouseholdsinMaltahaveincreasedbroadlyinlinewiththoseintheeuroarea,butratesfornon-financialcorporates(NFCs)havebeensubdued.2Onloans,mortgagerateshaveremainedbroadlystable,whiletheincreaseinlendingratesforNFCswasonlyabout100basispointsfromJune2022toSeptember2023,muchlowerthanthe250basispointsincreaseintheeuroarea.Asaresult,theECB’scompositecostofborrowingindicatorssuggestthatborrowingcostsinMaltaarethelowestforhouseholdsandthethirdlowestforNFCsintheeuroarea.3 Figure2.RetailRatesinMalta HHDepositRates (Newissuances,percent) NFCDepositRates (Newissuances,percent) 44 NFC-Totaldeposit Euroarea-NFCdepositrate 3 3 2 2 1 1 0 0 2017m11 2019m10 2021m9 2023m8 -12017m11 2019m10 2021m9 2023m8 HHLoanRates (Newissuances,percent) NFCLoanRates (Newissuances,percent) 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2017m11 7 HH-Totalloans Euroarea:HHtotalloans 6 NFC-upto1yearEuroarea-NFCtotalloans 5 4 3 2 1 2019m10 2021m9 2023m8 0 2017m11 2019m10 2021m9 2023m8 HH-TotaldepositEuroarea-HHdepositrate 2DepositsdonotincludeO/Ndeposits. 3Thecostofborrowingiscalculatedbyincorporatingvariousloantypesandassigningweightsbasedontheirsignificanceinaparticularmarketinindividualcountry.SeeMullerandRumpf(2023). INTERNATIONALMONETARYFUND3 MALTA Figure2.RetailRatesinMalta(Concluded) CostofBorrowingforHHforHousePurchase (Percentperyear,October2023) CostofBorrowingforNFC (Percentperyear,October2023) NLD LUX MLT MLT HRV FRA FRA ESP NLD AUT BEL FIN EUR ESP HRV BEL SVN SVK EUR ITA DEU AUT SVN DEU LUXIRL IRL PRT FIN ITA GRC SVK GRC PRT CYP EST CYP LTU EST LVA LVA LTU 012345678 0 1 2 3 4 5 6 7 Sources:ECBDataPortal 4.Againstthisbackground,thischapterexaminesthepass-throughfrommonetarypolicyratestoretailbankinterestratesinMaltacomparedtoothereuroareacountries.SectionBpresentsthemeasurementofthepass-throughandempiricallycomparesthedegreeofthepass-throughinMaltawiththatinothereuroar