Mario Vella: The role of central banks at present. Monetary policies and exchange rates in the Mediterranean countries

Address by Dr Mario Vella, Governor of the Central Bank of Malta, at the European Institute of the Mediterranean (IEMed) Forum "The Mediterranean economies in a changing world Lessons learned in economic and financial instability: what scenarios can we envisage?", Barcelona, 24 February 2017.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Dear Governor Linde, dear fellow Governors, ladies and gentlemen,

Thank you for the invitation to participate in this forum on monetary and exchange rate policy in Mediterranean countries. The Central Bank of Malta is both a Mediterranean central bank, which once pursued a monetary policy regime similar to that followed by many Mediterranean central banks today, as well as a member of the Eurosystem.

Since January 2008, when Malta adopted the euro, the Central Bank of Malta is an integral part of the Eurosystem. This comprises the European Central Bank and the national central banks of those EU member states that have adopted the euro as their currency. For us, therefore, our monetary and exchange rate policy is that of the euro area as a whole.

The primary objective of monetary policy in the euro area is price stability. The Governing Council has defined price stability as an average annual rate of inflation of below, but close to, 2% over the medium term. This focus on price stability is based on the knowledge that money is neutral in the long run, meaning that it can affect nominal variables, such as the price level or the exchange rate, but not real variables, such as income and employment. It also reflects the historical experience of many countries, which clearly shows that inflation is ultimately a monetary phenomenon.