Across the world, the period which followed the pandemic was characterised by a surge in inflation. In reaction, central banks hiked interest rates to reduce domestic demand and bring it more in line with supply. Since July 2022, for instance, the European Central Bank (ECB) has raised its main refinancing operations interest rate from 0% to 4.5%.
If one had, for example, a €200,000 mortgage and all this rise in the ECB rate was passed unto this customer by their bank, they would end up having to pay €9,000 more in mortgage servicing costs. Every month they would be saddled with additional bills of €750. When one considers the magnitude of this blow, which comes at a time when European consumers are burdened with sky-high energy and food prices, it is easy to understand why retail sales have plummeted and economic growth disappeared.
Yet, despite Malta being part of the monetary union, interest rates have remained stable. A study published by the International Monetary Fund (IMF), in fact, notes that Malta was the only European country where annual mortgage servicing costs did not rise. In contrast, in many other countries, rising mortgage servicing costs had devastating economic impacts. For instance, in Portugal there was a negative impact of more than 1.2% of the GDP, wiping off most of the economic growth that this country was expected to experience. Even in Finland, rising mortgage interest rates managed to wipe away over 1% of the GDP. These are shocks of an unprecedented nature which have led to great hardship amongst European consumers.
How did it happen?
How has Malta remained immune to all of this? One thing is for sure: it is not because Maltese banks have suddenly become generous. In fact, the track record of Maltese banks is that they charge higher rates than other European banks and pay lower deposit rates. Moreover, anyone who follows the financial press is aware that Maltese banks are currently making extraordinary profits, and typically that is never a sign of corporate over-generosity.
The IMF points out that the fact that Malta has seen no increase in interest rates is due to abundant liquidity in the banking system. Essentially, Maltese banks have so many deposits compared to the loans that they are issuing that they do not need to borrow money from the ECB. Thus, they have no need to raise the interest rates they charge to their consumers.
What is the cause of this abundant liquidity? Of course, the very strong economic growth that our country has had, combined with the enormous fiscal support package that Government has provided to families and firms. The latter is more than one and a half times the EU average, and this discrepancy is rising as other countries are removing what little assistance they had left. The fiscal support in Malta has meant that bank deposits of firms and families have reached record levels. Banks literally have so much cash lying around that they do not know what to do with it. In such an environment, if they raised interest rates on loans, they would risk lending less. Their behaviour has nothing to do with generosity – as always, it is the result of cold business logic.
According to the Household Finance and Consumption Survey of the Central Bank of Malta on average Maltese households have €73,000 in mortgage loans, which means that they are being spared up to €3,300 in additional mortgage costs because of the excess liquidity in the country. Over and above that, first time buyers are getting a €1,000 annual grant during the first ten years of their mortgage.
Photo: RDNE Stock project