Bank of Valletta does “is not feeling the need to adjust its interest rates,” chairperson Gordon Cordina and incoming CEO Kenneth Farrugia said in an opinion piece published by the bank.
In recent weeks, the European Central Bank (ECB) has raised rates by 1.25 per cent, a swift change in policy after around a decade where banks could borrow money from the ECB at no interest.
A spike in energy and food prices due to the war in Ukraine, as well as an increase in shipping costs has led to widespread inflation. In order to combat this rising tide, central banks around the world have increased interest rates, making it more expensive to borrow money in the hopes to cool down economic activity, and hopefully a cool down of prices.
Overseas, interest rate increases by central banks quickly filter down to the retail level, that is domestic banks the average consumer is used to dealing with, leading to adjustments in credit card rates, interest rates on home loans and business lines of credit.
In Malta, where the strength of the home loan market is undeniable – national statistics place home ownership rates at 81 per cent in 2020 – the possibility of changes to home loan interest rates by the country’s domestic banks would have a widespread impact on household purchasing power.
Delving into the issue, Prof Cordina and Mr Farrugia explain that during the ECB’s decade of zero interest, interest rates for bank loans and deposits in Malta had fallen to their lowest levels ever.
“As was the case when interest rates were falling, interest rate increases by the ECB do not translate automatically into equivalent and immediate changes to the rates charged by banks to their borrowing customers, or the rates offered on deposits.
“So far and for the foreseeable future, Bank of Valletta is not feeling the need to adjust its interest rates, because it is funded by a strong liquidity position, underpinned by both personal and corporate deposits, which does not make it dependent on ECB funding,” Prof Cordina and Mr Farrugia wrote.
While inflationary pressures continue to persist, driven by disruptions in the global supply chain, the ECB “is likely to continue raising interest rates until price inflation slows and adopts a direction towards its two per cent inflation target over the medium term.
“Thus, over the longer term, a higher interest rate scenario could need to materialise in Malta, as domestic monetary and financial conditions cannot remain insulated from permanent changes in interest rates in the euro area for an indefinite period,” they add.
The leading bankers then say that “in a sense”, a longer-term increase in interest rates would be “a return to more normal levels of interest rates following a decade of unusually low rates, which was to be expected.”
They explain that the prudent stance adopted by domestic banks when granting loans to customers over the past years “should ensure that customers can cope with their debt servicing obligations,” that is higher repayment rates on their loans.
They stress that local banks “take great care” in assessing affordability when granting loans, “by making allowance for possible higher debt servicing costs”.
“It is however also important to consider that higher interest rates on loans would have impacts on the costs of business and on the purchasing power of households in an inflationary environment that is presenting new challenges of its own right, with implications for economic performance and the overall well-being of society.”
The conclude by saying BOV will be closely monitoring developments with the ECB policy rates, and that it will strive to strike a balance among stakeholders, both depositors and borrowers, when setting its interest rate structure.
“The strong liquidity position through which the Bank is funded will help to ensure that any future changes in interest rates will be well-managed, gradual and to the extent possible, without surprises.”
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