It is, therefore, appropriate on this occasion to acknowledge the valuable work carried out by the National Euro Changeover Committee and its Steering Committee. I would also like to pay tribute to the staff of the Central Bank of Malta for their contribution in preparing the Bank for its role as a member of the Eurosystem and in planning and executing the currency changeover. During more than two millennia the Maltese people have used many different currencies in circumstances often dictated by the changing balance of power in the Mediterranean, and reflective of Malta’s status as a dependency of some larger and more powerful nation. The adoption of the euro, however, is a change of currency with a difference. This time it will occur because Malta, out of its own choice, will join fourteen other sovereign Member States of the EU in an economic and monetary union designed to complement the Single European Market, a venture that could rightly be described as an epoch-making development in the history of our continent. Since Malta joined the EU in 2004, and particularly since the Maltese lira entered ERM II in 2005, the Central Bank of Malta has been making the case for an early adoption of the euro. And for good reason.
Given the information at the Bank’s disposal and the assessments made by the Bank at the time the projections are made, the interest rate forecast in the Inflation Report will reflect a monetary policy that provides a reasonable balance between the objectives of stabilising inflation at target and stabilising output and employment. This forecast might in many cases be close to market expectations, but this will not necessarily be the case. When the interest rate forecast reflects a monetary policy that provides a reasonable balance, it contributes to monetary policy predictability. With a predictable monetary policy, market participants can react to new information in a way that contributes to stabilising developments in output and inflation. This makes monetary policy more effective, especially if market participants share the central bank’s analyses and assessments. To be successful, monetary policy must be capable of influencing expectations. This is essential to effective monetary policy. The essence of this argument is that it is primarily through the expectations channel that the central bank can influence economic developments. The expectations channel is the most important channel for monetary policy transmission. 3 The central bank determines the shortest money market rates via the key rate. The shortest rates, however, are of limited importance to economic agents’ consumption and investment decisions. These decisions depend more on agents’ expectations with regard to future developments in the key rate. The key rate is primarily effective because it influences market expectations concerning future interest rates.