In the past few months, in its endeavours to stimulate the economy, the European Central Bank (ECB) has kept the rates of interest at record lows. In its latest decision at the beginning of September, the ECB decided that the interest rate on the main refinancing operations and interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00%, respectively.

But President of the General Retailers and Traders Union (GRTU) Paul Abela complained that interest rates charged in Malta on commercial loans do not reflect the rates established by the ECB. During an intervention that he made during the business breakfast held on Friday as part of the Budget 2013 consultation meetings, Paul Abela said that the regulatory bodies in Malta should intervene in this area.

Minister of Finance, the Economy and Investment Tonio Fenech admitted that the policy adopted by the ECB is not reflected in the rates charged by local banks. He said, however, that the European Union does not have a regulatory structure that dictates interest rate reductions to banks. He said that discussions on the matter with local banks are ongoing, pointing out that the increase in banks established in Malta helps establish a competitive rate.

Speaking to di-ve.com, Paul Abela said that rates charged vary according to the risk element. His argument is that there is a huge disparity between rates charged on home loans and those charged on loans to businesses. He said that while rates on home loans are at around 2.75%, rates on business loans vary from 4.5% to around 6%. He added that the Malta Competition and Consumer Affairs Authority is the authority that should control the banks, as it does regarding other businesses.

Central banks around the world use interest rates as a means to stimulate or control the economy. In difficult financial times, and especially in the recent credit crunch, when banks are reluctant to lend money, central banks lower base rates to make lending more affordable.

Economists are now anticipating that the ECB will remove another 25 basis points of the lending rates by the end of the year in view of the current economic situation.