| Summary: | This Selected Issues paper examines the pass-through dynamics from monetary policy interest rates to retail bank interest rates in Malta, in comparison with other euro area countries. In Malta, the pass-through to both deposit and lending rates has been relatively limited since the European Central Bank started a tightening cycle in July 2022. This can be attributed predominantly to abundant liquidity and the structure of banking system, aligning with historical patterns. Empirical results suggest that various banking sector characteristics appear to play an important role in moderating the pass-through effect of policy rates. The pace of monetary transmission in Malta has been much slower compared to other euro area countries. This has potentially important implications for policymaking. Taking into account the interest rate channel of monetary policy, the Central Bank of Malta estimated that the direct impact from rising rates on economic activity and inflation would be quite limited. Accordingly, given the weak interest rate channel, fiscal policy should play an important role in macroeconomic stabilization. Furthermore, as deposit rates have risen faster than lending rates, their implications for banks’ profitability could warrant close monitoring, especially for those banks with a high loan-to-deposit ratio
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