The rationale of our regime, i.e., providing support to the currency, does indeed require us to mirror interest rates offered by other currencies – primarily the euro since we moved to a full peg last May – , but in addition we also need to offer a premium to holders of Maltese lira assets to compensate for the small size and vulnerability of our economy. Our judgement on the appropriate size of that premium at any point in time, complemented by considerations relating to financial market sentiment and economic conditions generally, determines our decisions on the Bank’s central intervention rate. The markets have so far judged the interest rate premium on the lira as being appropriate. 4  BIS Review 16/2006  7. It would be ironic if the government were to meet the fiscal criterion for euro adoption, but fail because of the inflation rate. What interest rate policy will the Bank adopt in this regard? I have already explained that the focus of monetary policy in a fixed peg regime is the exchange rate. Unlike most countries with a floating regime, we are not inflation targeters. The Bank’s ability to influence price levels directly through its power to change short-term interest rates in the money market is, therefore, rather limited.
Exploiting the new market opportunities takes time because institutional structures and  BIS Review 16/2006  1  operating practices need to be adapted. Some of the funds Malta is getting from the EU are being used precisely to strengthen the economy’s export potential. At the same time, it is also true that the EU economy did not grow as rapidly as anticipated in 2005. It expanded by 1.6 per cent, compared with 2.3 per cent in 2004. A higher proportion than ever of consumer demand, moreover, was satisfied by imports from more competitive producers at the expense of established suppliers. Finally, as I have already observed, the persistence of sluggish growth in the Maltese economy cannot be explained exclusively in terms of a cyclical downturn. Delays in implementing effective competitiveness-enhancing reforms were also a factor. As a result, the economy was not fully prepared to exploit the single market. 3. In these circumstances, isn’t this the worst time to be strait-jacketed by the conditions for euro adoption? Wouldn’t a fiscal boost speed up economic growth, now that your already limited monetary policy tools have been put in the shed? Allow me first to correct two misconceptions implicit in your second question. For a start, our monetary policy tools have not been put away but are available for use if needed, as was the case in April last year when the Bank’s central intervention rate was raised by 25 basis points.