No changes in BOV interest rates for up to three years, ‘barring any surprises’

Bank of Valletta chairman Gordon Cordina has confirmed that the bank is well-positioned to stick to its current interest rates for the medium term, saying that it is unlikely to raise rates to any significant degree in the next two-and-a-half to three years.

“Barring any surprises – and there can always be surprises – the bank has enough capital and liquidity to leave our interest rates where they are,” he tells BusinessNow.mt.

The accomplished economist, who has chaired the board of Malta’s largest bank since 2020, was replying to question posed after the European Central Bank (ECB) raised interest rates by another 0.25 percentage points, reaching a new record.

The ECB justified the increase by saying that inflation was still likely to remain high “for too long”, although it indicated that this would likely be the last increase for the time being, noting that the key interest rates have reached levels that, maintained for a sufficiently long duration, “will make a substantial contribution to the timely return of inflation to the target”.

When central banks started increasing interest rates in earnest last year, local observers and stakeholders immediately noted that the domestic Maltese credit market is “relatively insulated” from the effects of the rapid increases being forced through.

Back then, Dr Cordina had said that BOV “is not feeling the need to adjust its interest rates, because it is funded by a strong liquidity position, which does not make it dependent on ECB funding”.

By lending out depositors’ savings, rather than money borrowed from larger institutions, Maltese banks – and the wider economy – are cushioned from the upheaval happening elsewhere.

As long as the rate banks offer on savings accounts remain extremely low, there is no reason for them to raise their interest rates for borrowers.

Dr Cordina noted that although “interest rate increases by the ECB do not translate automatically into equal changes to the rates charged by banks to their borrowing customers, BOV’s future base rate will be shaped by the overall size and pace of the ECB’s interest rate decisions, especially if interest rates remain high over the medium to long term”.

The ECB’s decisions, then, are ultimately not significant enough to force a change in the local banking scenario.

For investors and depositors, however, the current scenario “presents opportunities for investors to diversify their liquid deposits into long term investments, such as pension plans,” says the BOV chairman, highlighting the potential to benefit from tax incentives in this space.