Energy subsidies could keep inflation from slowing down – Central Bank governor

Central Bank governor Edward Scicluna has said energy subsidies in Malta are keeping domestic demand buoyant, to the extent that it might be countering a relaxation in price inflation.

Scicluna, a former finance minister, said energy subsidies should now be targeted and temporary, as both the IMF and the European Commission have this requested by calling for a gradual reduction in energy subsidies and for Malta to take its deficit down to below 3% of GDP.

Addressing the Institute of Financial Service Practitioners in his annual speech, Scicluna said that while post-pandemic supply bottlenecks appeared to be correcting themselves, Malta’s €320 million in subsidised energy and fuel prices could be countering a disinflationary effect.

“Overall inflation in Malta is set to ease further in the coming months. The disinflation process is largely being supported by the resolution of supply chain bottlenecks and the lagged impact of tighter monetary policy on imported inflation,” Scicluna said.

However, he said that a number of domestic factors were now working in the opposite direction. “These include a still dynamic economy buoyed to some extent by the support to demand arising from the energy subsidies,” Scicluna said.

He also added that a weak pass-through of the higher rates on deposit and lending rates in Malta were also supporting robust credit growth, especially in real estate. This means that with more cash in hand, price inflation might not be abating as fast as desired.

“This state of play may be good for economic growth in the short-term. However, it also means that the power of a key policy tool that is geared towards dampening demand and hence inflationary pressures is severely diluted in Malta,” Scicluna said.

The CBM Governor conceded however that there was a strong, indirect inflationary effect from import prices. He said better use of NextGenerationEU funds, as well as faster digitalization and upskilling of human resources, was essential in supporting the Maltese economy

Drawing on his own experience, Scicluna said Malta had to focus on keeping its rate of economic growth higher than the rate of interest of its public debt, which has to remain below 65% of GDP under EU laws.

“The current and future environment cannot be compared to the pre-Covid period. It will definitely be more challenging this time. So nobody in his or her right senses will ask for a sharp fiscal consolidation. But wherever the economy allows it, we should grab the opportunity to make further progress towards stabilising and reducing the primary imbalance. The future is highly uncertain and shocks could come from anywhere, so building buffers will enhance the resilience of our economy.”

The Maltese economy has also been characterised by a high degree of labour tightness, and inflation in Malta is also moderating from high levels. After having reached a peak of 7.3% in December 2022, overall inflation is estimated to have fallen to 4.2% in October, while inflation excluding food and energy is estimated at 3.6%.