When looking into foreign exchange in Malta you should know the local currency is the Euro (EUR), which means its monetary policies are issued by a separate financial institution – the European Central Bank (ECB).
As you may know, the advent of the Euro dismissed exchange restrictions within the Euro Zone. This means you are free to hold foreign currency as well as foreign currency investments when living in Malta.
The reasons behind unrestricted currency exchange
Since the Euro currency implies liberation from exchange rate regulations, this means there is no exchange rate target to obey. While it’s possible the ECB may (in drastic situations) intervene in the local exchange market, that is not a common occurrence.
The Euro was devised as a way to confront the US Dollar as a leading world currency. Various currencies from countries outside the Euro Zone (such as Denmark and Morocco as well as Eastern European Nations and certain countries in the Sub-Sahara) are indirectly dependent on the Euro.
Understanding local monetary policy
According to the TFEU (Treaty on the Functioning of the European Union) article 127(1), the role of the ECB is to uphold stability of price. Unless this principle is at stake, the ECB most not oppose the general policies in EU economy.
Since ECB remains so committed to upholding price stability within the Eurozone, they aim for an inflation rate lower than (and as close as possible to) 2%. This target is managed by the HICP (Euro-zone Harmonized Index of Consumer Prices).
Looking at progressive developments
Until the present time, the strategy enacted by the ECB to restrain inflation revolved around a docile monetary policy whose purpose is to avoid restricting growth. Prior to the Euro crisis – from 1999 through 2012, inflation remained stable at 2%. The events in 2013 forced the ECB to loosen inflation control, which caused inflation to go down to 0.7%, with this number being expected to rise to 1.4% by the following year.
Even today, the international trend demands for a dovish monetary policy to encourage stability. A direct consequence of this policy is unrestricted exchange rates between countries encompassed by similarly dovish policies. As such, you may want to check on the policies currently upheld by the ECB in your own home country to know where you stand market-wise.
Keep in mind that a dovish policy goes hand in hand with extremely low interest rates, which may even fall under current inflation levels. This conjecture makes for a negative interest rate in real world terms – a very unfavourable situation for people looking to increase their savings.
The scenario above is however a present necessity, as an exceedingly tight financial policy that might prompt an increase in interest rate would negatively impact overall liquidity, and make the price of securities plummet. This is something all expats in Malta should keep in mind while doing foreign exchange.
