IEMed Forum The Mediterranean economies in a changing world Lessons learned in economic and financial instability: what scenarios can we envisage? The role of Central Banks at present. Monetary policies and exchange rates in the Mediterranean countries Address by Dr Mario Vella Governor of the Central Bank of Malta Barcelona, 24 February 2017  Dear Governor Linde, dear fellow Governors, ladies and gentlemen, Thank you for the invitation to participate in this forum on monetary and exchange rate policy in Mediterranean countries. The Central Bank of Malta is both a Mediterranean central bank, which once pursued a monetary policy regime similar to that followed by many Mediterranean central banks today, as well as a member of the Eurosystem. Since January 2008, when Malta adopted the euro, the Central Bank of Malta is an integral part of the Eurosystem. This comprises the European Central Bank and the national central banks of those EU member states that have adopted the euro as their currency. For us, therefore, our monetary and exchange rate policy is that of the euro area as a whole. The primary objective of monetary policy in the euro area is price stability. 1 The Governing Council has defined price stability as an average annual rate of inflation of below, but close to, 2% over the medium term.
When the Bank was founded in 1968, Malta formed part of the sterling area, reflecting its past as a British colony and its strong ties with the United Kingdom. When the Bretton Woods system collapsed in 1972, the Maltese monetary authorities decided to break the exclusive link with the pound sterling and to peg the lira to a trade-weighted basket of currencies. During the 1980s the composition of the basket was revised on several occasions until, in 1989, the number of component currencies was reduced to three, the ECU - which had replaced several European currencies - the pound sterling and the US dollar. In 2002, the weight of the euro was raised to 70%, while those of the dollar and the pound were set at 20% and 10%, respectively. Following Malta’s accession to the European Union, in May 2004, the authorities resolved to move swiftly to adopt the euro. A year later, the Maltese lira entered Exchange Rate Mechanism Mark II (ERM II) with a unilateral commitment by the Maltese authorities to maintain its value unchanged at the central parity rate. This central parity rate then became the conversion rate between the Maltese lira and the euro when Malta adopted the single currency at the beginning of 2008. In effect, Malta has moved from a currency union with the pound sterling to membership of the euro area, with a period characterised by a basically fixed exchange rate in between.