High inflation is not going away any time soon, warns Finance Minister Clyde Caruana

Finance Minister Clyde Caruana made it clear at a meeting with the Malta Council for Economic and Social Development (MCESD) that while high inflation will outstay its current sojourn, EU rules are now also requiring a narrowing of the government deficit.

World-wide prices are expected to keep rising as a result of high oil prices coupled with the combined supply-chain disruptions of the war on Ukraine on the tail of the COVID-19 pandemic said Mr Caruana, and he predicted that the EU would be next after the US saw increased August inflation.

The Minister told the MCESD that it was clear “the inflation rate has a long time before returning to the levels of around two per cent we had become accustomed to in the past,” as reported in The Times of Malta.

As of this July, the country’s rate of inflation was at 5.6 per cent when compared to last year, with the National Statistics Office saying that the highest annual inflation rates in July were 10 per cent for food and non-alcoholic beverages and 7.6 per cent for housing, water, electricity, gas and other fuels.

The pandemic drove the European Commission to allow for more government spending by relaxing its debt and deficit rules. However, the Minister added that the EC will now revise its fiscal policy and revert to its excessive deficit procedure. This is specifically done to curb inflation. A deficit limit of three per cent of GDP cannot be breached once this procedure returns, and neither can a government debt level be above 60 per cent.

Last year Malta’s budget deficit was of around 5.6 per cent. Mr Caruana said that deficit rates must be brought down next year as the budget will surpass the three per cent threshold. He also said that our budget, which is the most expansionary in the EU, must be brought down soon, and interest rates were expected to be continually raised by the European Central Bank.

Private and government bonds are expected to carry a higher premium continued the Minister, although local banks had, on the whole, kept their interest rates stable.