I should like to take this opportunity to explain the current assessment, which is in line with the Governing Council’s expectations at the beginning of April. With regard to the first pillar of the Eurosystem’s monetary policy strategy, monetary growth cannot be seen as signalling upcoming inflationary pressures at this stage. Since the beginning of this year, the three-month moving average of M3 growth has been close to the reference value of 4.5%. For the period from January to March 1999 the average growth rate increased somewhat to 5.2%. This observation may, however, have been affected by special factors prevailing at the start of stage three. Therefore, in its current assessment the Governing Council does not regard current monetary trends as constituting a signal of future inflationary pressures. With regard to the second pillar of the Eurosystem’s monetary policy strategy, the broadly based outlook for price developments and risks to price stability and various indicators of future price developments and economic activity in the euro area indicate a favourable outlook for price stability. Financial indicators such as the very low level of long-term interest rates point to low inflation expectations and the credibility of monetary policy. Following the cut in short-term interest rates, long-term rates decreased somewhat initially, which confirms that the market considered the cut in interest rates by the ECB to be appropriate. More BIS Review 60/1999  4  recently these rates have risen somewhat, mainly as a reflex to the strong increase in longterm interest rates in the United States.

A stable financial system is also one that is able to manage risks that may harm its performance, and consequently that of the economy, and that should be able to absorb shocks without impairing its operations. The Bank carries out this task through the regular monitoring of the financial system, as well as of the domestic payment and securities settlement systems. The Bank’s findings are shared with the Malta Financial Services Authority (MFSA) and with the Ministry of Finance. The Authority is responsible for the prudential regulation and supervision of all financial institutions in Malta, while the Bank remains the lender of last resort. It is, therefore, the only domestic institution with the capacity to inject liquidity into a troubled institution against collateral. The Ministry of Finance, on the other hand, is involved with respect to the possible use of public funds. As the international financial crisis unfolded, the Bank was in continuous contact, at the highest levels, with both the MFSA and with the Ministry of Finance. It also took steps to obtain more frequent balance sheet data from credit institutions. The Government on its part gave a commitment to protect financial institutions and depositors in Malta should the need ever arise. Meanwhile, and in the light of similar steps taken elsewhere, it decided to raise the guarantee provided on bank deposits to EUR100,000. Here I would like to remind this audience that the relevant EU Directive emphasises that the cost of financing such guarantee schemes must be borne by the credit institutions themselves.