Malta’s Central Bank Governor urges ECB caution as oil prices ease inflation pressures

Malta's Central Bank Governor, Alexander Demarco, has urged the European Central Bank (ECB) not to rush into another interest rate increase, arguing that the recent sharp decline in oil prices has strengthened the case for patience.

Speaking to Reuters on the sidelines of the ECB Forum on Central Banking, Mr Demarco said that, with price pressures continuing to moderate, policymakers should avoid acting prematurely.

"In such an environment of moderating price pressures, it would be prudent not to rush into policy action," he said.

According to Mr Demarco, lower energy prices are expected to feed through into lower inflation expectations and help contain wage demands, particularly as real wage growth remains positive despite inflation still standing above the ECB's 2 per cent target.

His comments add to a growing number of ECB policymakers advocating a pause in interest rate increases after the ECB raised rates in June. Financial markets are currently pricing in roughly a one-in-three chance of another rate hike this month, while a move by October is widely expected.

Mr Demarco said there would only be a strong case for bringing forward another rate increase if indirect inflationary pressures intensified, inflation expectations became unanchored or wage demands accelerated.

"We're seeing none of these, so given current conditions with oil prices returning to around pre-conflict levels, we can afford to wait for the next set of projections rather than risk hurting unnecessarily economic growth with another hasty rate hike," he said.

However, he cautioned that the door remains open for further monetary tightening should the ECB's updated economic forecasts support such a move.

"It's worth remembering that even the milder scenario of the latest projection included more policy tightening. So if that path is confirmed, a further rate hike may still be needed," Mr Demarco said.