Loan rate stickiness : a case for Malta

Abstract

We have seen that despite Central Bank’s efforts to bring interest rates close to zero, rates have remained sticky. The efficiency of monetary policy is especially important in Malta, where the majority of businesses are small and medium-sized enterprises dependent on bank funding. Statistics reveal that this ‘synthesis' does work, but only up to a point, especially within a given time frame. A recent study which looked into the responsiveness of local loan rates to policy rates set by the ECB since Malta joined the Eurozone shows that retail rates stopped following monetary impulse since 2011(Micallef and Gauci, 2014) and that current monetary policy may have reached its limits. One could argue that rates have reached a 'natural’ rate and cannot be pushed down further. However, we hypothesise that the reason behind such a phenomenon is not quantitative in nature but more of a humanistic one. It is these whys and wherefores which we hope to uncover by looking into existing works which have looked at a similar problem and through the use of interviews by which one hopes to uncover new reasons specific to the local scenario.