Given my assessment of the data as they stand and recognising the substantial policy tightening already implemented, in my view the MPC’s current priority must be to ensure we see the job through, so as to return inflation to target on a sustainable and lasting basis. It remains premature to declare victory over the unacceptably higher rates of inflation we have seen recently. Continuing to raise rates at the pace and magnitude seen over the past year would eventually – and perhaps soon – imply that monetary policy had cumulatively been tightened too much. Nevertheless, given where we stand, I still choose to emphasise the MPC’s need to be watchful for signs of greater-than-expected persistence in inflationary pressure. And I would flag the need for the Committee to maintain a readiness to act to address any such persistence should it emerge. We have long signalled how we assess the potential for inflation persistence: by looking at the strength of corporate pricing power along supply chains, by evaluating the tightness of the labour market, by weighing up wage developments and their implications for services price inflation. The past few days have yielded some new information along these dimensions. Tuesday’s labour market release pointed to signs that the UK labour market loosened a little in the fourth quarter, in line with the narrative underpinning the MPC’s February Monetary Policy Report.
As a result, inflation in Malta was lower than in the euro area for most of the last six months, partly compensating for the higher rates registered previously. In the context of an economic recession, Malta’s public finances performed relatively well in 2009, although the country is still subject to an Excessive Deficit Procedure. The deficit-toGDP ratio declined from 4.5% to 3.8% in spite of an outlay of some 0.7% of GDP by way of  BIS Review 73/2010  1  targeted assistance to manufacturing firms and other stimulus measures. 1 To a large extent, however, the fall in the deficit ratio is explained by the presence of one-off expenditure items in 2008. 2 The general government debt ratio rose by around five percentage points to end the year at 69.1% of GDP, still below the estimated 78.7% euro area average. These developments helped to underpin confidence in Maltese government bonds, which are primarily held by domestic residents. In fact, all the government and corporate bond issues launched in 2009 were oversubscribed, in spite of the fact that the issuance volume doubled compared with 2008. Credit rating agencies have confirmed Malta’s sovereign credit standing, with Moody’s giving an A1 rating with a stable outlook. Spreads over the German benchmark ten-year bond yield have remained stable over the past year at around 123 basis points. Sources of economic resilience The relative resilience of the Maltese economy is mainly attributable to four factors. The first is the adoption of the euro.