Interview by Vladimir Gürtler | Text for PRIMA NEWS
Inflation under control, real estate cooling down, and the digital euro on the horizon.
In an exclusive interview for PRIMA NEWS, Acting Governor of the Central Bank of Malta Alexander Demarco offers a detailed insight into Malta’s current economic landscape. From inflation trends and real estate sustainability to the looming impact of digital transformation in finance, Demarco openly discusses the key challenges and strategic priorities shaping Malta’s monetary and financial stability in the second half of 2025. The interview was conducted by Vladimír Gürtler.
1. How would you assess the current inflation trends in Malta? Which sectors are most affected by price increases, and what are the main contributing factors?
Following the sharp increase in inflation during 2022 and 2023—driven by global factors such as pandemic-related supply disruptions and the Russia-Ukraine conflict—inflation in Malta moderated considerably over 2024 and stood at or below 2.0% between December 2024 and February 2025. However, recently, we have observed a modest uptick in inflation. HICP inflation in the first five months of the year averaged at 2.3% and has been mainly driven by an acceleration in food prices and airfares. The rise in food inflation mirrors the acceleration observed in food prices in the euro area, from where Malta mostly imports its food supplies, while the increase in airfares reflects the strong demand for tourism in Malta, with the number of tourists growing by over 17% in the first four months of this year. Nevertheless, looking ahead, we expect inflation in Malta to gradually ease towards 2.0% due to an expected moderation in services inflation with easing wage growth and slower economic growth.
2. How does the situation on the Maltese real estate market impact the overall stability of the national economy? Is the current price growth sustainable, or are there signs of overheating?
According to the Bank’s house price misalignment indicator, there are no significant signs of misalignment in house prices in Malta. Demand for residential real estate in recent years has been driven by strong employment growth, largely through inward migration as the native working age population is shrinking and participation rates are already high. Strong growth in tourism is also another contributor. In the case of tourism, growth in accommodation in collective establishments is being outpaced by that in rented residential units, and the share of tourists staying in hotels in 2024 eased to around 61% from 63.5% in 2022, which keeps demand for residential property to rent out to tourists strong. We therefore expect growth in house prices to slow as employment growth is moderating, also with more stringent migration policies. We also expect growth in tourism to slow from these current elevated rates as flight capacity constraints become more binding. In the first quarter of 2025 we have already seen signs that house price inflation has moderated and converged to the EU average of 5.7%.
3. What is the Central Bank of Malta’s position on the current level of ECB interest rates? Do you consider them appropriate for the local economic conditions?
As you are aware, monetary policy is based on euro area and not country specific considerations, and in my view the current monetary policy stance of the ECB is appropriate for the euro area given that inflation has reached 2% and is expected to remain sustainably at this level in the medium term, although with the current high level of uncertainty and unpredictability, it remains important to follow a meeting-by meeting approach, and there can be no room for complacency.
Concerning Malta, the transmission of the ECB’s monetary policy via the local banking system has been limited. This is because the main source of funding of domestic banks is retail deposits which mostly take the form of current or savings accounts where remuneration on such holdings is zero or close to zero. Although when interest rates by the ECB were raised in 2022 and 2023 we did witness some increase in term deposit interest rates and this incentivised depositors to shift some of their savings into term deposits, nevertheless interest expense for the banks with the strongest links to the domestic economy remained low. Therefore, banks could afford to keep mortgage rates unchanged, while lending rates to non-financial corporates increased slightly. Indeed, bank profitability improved. The decline in ECB rates have led to only a modest reduction in term deposit rates while lending rates on both mortgages and to NFCs remained broadly stable. So far, the result has been one where inflation in Malta has broadly converged to the 2% target without stress on financial stability as the banking sector continues to be well-capitalised, highly liquid, with improving asset quality as NPLs have come down to low levels, and profitability of banks being supportive.
4. More residents and foreign nationals are expressing concern over the rising cost of living. What is the Bank’s perspective on real income development in the coming months?
Over the past decade, although Malta has experienced robust economic growth, inflation—as measured by the Harmonised Index of Consumer Prices (HICP)—has broadly remained in line with that of the euro area.
Inflation rose significantly during 2022–2023, largely reflecting global developments. These included pandemic-related supply chain disruptions and the economic fallout from the Russia-Ukraine conflict. However, even during this period, inflation was notably lower than in the euro area. This was primarily due to the Maltese Government’s intervention to shield households and businesses from the direct impact of surging energy prices.
The concern of citizens, both in Malta, and more so in the EU, regarding the rise in the cost of living in recent years is legitimate because according to Eurostat’s HICP data, food and energy prices, which are items that are frequently purchased by households, have evolved such that food prices (including alcohol & tobacco) in June of 2025 were higher by 30.5% in Malta and 31.5% in the EA than what they were in January of 2020, right before COVID. In the case of energy, prices were a third higher than what they were in January 2020 in the euro area, while in Malta they were 3.5% cheaper because of the subsidy policy of Government. These are quite sizeable increases in the span of five and half years. During this period, or more precisely until Q1 of 2025, average compensation per employee grew by about 21.7% in Malta and by 23.1% in the euro area, which falls short of the increase in food prices in both economies, and also short of the growth in energy prices in the case for the euro area.
However, in the case of Malta the overall HICP is affected by consumption of tourists, which, apart from being impacted in the catering sector by higher food prices, this period also witnessed strong increases in demand which impacted air travel and accommodation prices. Hence, between January 2020 and May 2025, the Retail Price Index, which measures inflation for resident households only, increased by 19.3% (compared to 25.4% in the overall HICP) which is slightly lower than the 21.7% increase in compensation per employee. Thus, although this suggests that real wages were preserved, however, it is also well known that wages tend to react with a lag to past inflation, and although we are starting to see wage growth slowing down in 2025, wages are still growing strongly and far outpacing inflation. Additionally, in Malta in 2025 the Maltese government implemented cuts in taxes on income through the widening of tax bands, affecting all employees, which has improved their disposable income. Thus, in the projections that we published in June, for 2025 while we are projecting HICP inflation at 2.3%, we are expecting compensation per employee to grow by 4.4% and real disposable income to grow by 5.7%.
5. Tourism and services play a key role in Malta’s economy. How resilient are these sectors in the face of potential external shocks such as geopolitical risks or climate disruptions?
Over the past decade or so, the Maltese economy has become increasingly oriented towards services activities. These account for over 80% of gross value added. Services have also been the main engine of growth in recent years. Their composition, though, has evolved over time. The share of accommodation, food services activities and transportation fell from around 15% before Malta joined the EU, to around 9% on average in the last two years. While these sectors continued to expand, other private services have grown even faster. Services continue to show resilience. Tourism specifically is still expanding at double-digit rates, and while there are signs of some moderation in the pace of GDP growth, the latter nevertheless, remains among the fastest in the euro area. Furthermore, the moderation in GDP growth mostly reflects a correction from the very strong rebound after the pandemic rather than a result of some adverse impact from ongoing geopolitical tensions. To date, the impact of geopolitical tensions on the Maltese economy has been limited, although this does not mean that there is room for complacency. Being a highly open economy, the effects these can have on foreign demand, the exchange rate, and commodity prices do matter. However, analyses carried out by Bank staff, like for example, on the impact of US tariffs on EU exports, indicate that such effects should be manageable for Malta. At this stage, the impact of climate change is more challenging to pin down, as it depends on the ambition of adaptation policies and economic agents’ behavioural changes.
6. How is Malta preparing for the digital transformation of the financial sector, including the possible introduction of a digital euro? What opportunities and risks does this bring?
The local banking sector has been investing somewhat in digitalising its services. This investment has been largely driven by the intensification of competition, particularly in the field of payment services, with the licensing of various local payment institutions, but especially through passporting by EU licensed credit institutions that mainly offer digital banking and payment services. Several services by domestic credit institutions whose business is mostly oriented towards the local market are nowadays being offered online, and most have also introduced mobile payment systems, while this year they began offering instant payment services to their customers. They have also strengthened over recent years their KYC and transaction monitoring processes through investment in automated systems. Nevertheless, local banks do not use a common platform in their payment infrastructure and hence systems are not interoperable. Attempts were made in the past by the Central Bank of Malta to bring domestic credit institutions together to operate on a common platform that would enable interoperability among them. Unfortunately to date, domestic credit institutions failed to find an agreement on this matter.
However, the digital euro provides an excellent opportunity to address this limitation in Malta’s retail payment services as this would be operated on a platform that is not only interoperable across licensed credit and payment institutions in Malta, but across the whole euro area. Last November we conducted a survey and there is clearly willingness of the public to use the Digital Euro, especially those aged less than 55 years. As you may be aware, the consultation process of the EU Commission legislative proposal is still ongoing, and we are very active as a Central Bank in advising the local authorities on the matter, apart from that at the Eurosystem level. We see the digital euro as an opportunity also for locally licensed payment providers as the proposed compensation model, while being free of charge for basic services to consumers, provides opportunities for increased revenue as it does away with third parties in enjoying a share of merchant fees, which should not be any higher than existing schemes. The fear of banks that a digital euro could lead to liquidity shortages has been catered for in the design of the digital euro, partly because there are no plans to remunerate digital euro holdings, which are meant to serve as the digital equivalent of cash. More importantly, holding limits would address such fears, while the reverse waterfall function would allow consumers to use the digital euro to purchase large ticket items without the need of having high balances in digital euro accounts or high holding limits.
7. What are the Central Bank of Malta’s main priorities for the second half of 2025 – in terms of price stability, the labour market, or financial supervision?
As a central bank our prime objective remains always price stability. Therefore, we remain firmly committed to our contribution at the Eurosystem level in this regard. As to the labour market, this continues to be characterised by historically low rates of unemployment of around 3% and the challenge of insufficient labour remains. Of course, reducing the skills gap and more investment in technology to substitute labour are key at being able to register strong economic growth with lower reliance on inward labour migration. As to the financial sector, this remains sound with strong capital levels, high liquidity, good asset quality and supportive profitability. Nevertheless, from a macroprudential policy perspective, our aim is to strengthen measures that became effective in 2023 to address systemic cyclical and concentration risks related to the exposure of the domestic banking system to the real estate sector. To this effect, we have already initiated a consultation process with relevant stakeholders and shall be undertaking further assessments of any additional measure prior to taking a decision in this regard.
8. Does the Bank have current data on foreign investments from the Slovak and Czech Republics? In which sectors of the Maltese economy are these most prevalent?
The value of foreign direct investment (FD) by these two countries in Malta is limited and largely driven by the financial sector. That said, there have been some initiatives to facilitate trade and investment between the two countries also in non-financial sectors, with some interest reported in logistics, real estate and hospitality. It is also fair to say that the Czech Republic accounts for a bigger part of inward FDI in Malta than the Slovak Republic.
9. What is the estimated share of Slovak and Czech capital or business activity within Malta’s total foreign direct investment landscape?
The combined share of these two countries in inward FDI amounts to less than 1% of GDP.
10. Has the Central Bank observed increased interest from Slovak and Czech entities in doing business or investing in Malta in recent years? If so, what factors do you believe are driving this trend?
Given our mandate, we are not best placed to comment on the degree of interest by Slovak or Czech entities in doing business or investing in Malta. However, the Central Bank of Malta has been in recent months engaged in discussions with a Czech bank that had shown interest in acquiring a significant credit institution licensed in Malta and directly supervised jointly by the ECB and the Malta Financial Services Authority. We are aware that this Czech bank has already concluded a Share Price Agreement with the current shareholders of the Maltese bank and it is now at a stage where the competent authorities will be commencing a due diligence process with a view to approve, or otherwise, this share transfer by the end of this year. Should the competent authorities approve this share transfer we expect enhanced competition in the local banking sector which should be of benefit to local consumers.
Who is Alexander Demarco?
Alexander Demarco was appointed Acting Governor of the Central Bank of Malta on 1 August 2024. He also occupies the role of Deputy Governor of the Central Bank of Malta since 1 January 2014, initially responsible for Financial Stability and since August 2017 responsible for Monetary Policy, where he accompanied and acted as alternate to the Governor in the Monetary Policy Governing Council meetings of the European Central Bank (ECB). He is currently a member of the ECB’s High-Level Task Force on Digital Euro and High-Level Task Force on Climate Change-related Sustainable and Responsible Investments and is a member of the European Union’s Economic and Financial Committee. He is also Chair of the Joint Financial Stability Board. Mr Demarco was a member on the Board of Supervisors of the European Banking Authority and Supervisory Board of the European Central Bank until July 2017.
Prior to his appointment of Deputy Governor, he held the post of Head, Financial Stability Department of the Bank. He joined the Bank in 1984 and for most of his career worked in the Bank’s Economic Research Department as a senior economist, and subsequently was appointed as Head of the EU and International Relations Department. During his career at the Bank, he was directly involved in the construction of the Bank’s first econometric model and responsible for the Bank’s macroeconomic projections. He was also actively involved in Malta’s EU membership preparations and negotiations, and subsequently in exchange rate policy considerations in connection with the preparations for participation in ERM II prior to Malta’s membership in the Eurosystem. He also published a number of articles on the Bank’s publications. He graduated B.A. (Hons) in Economics from the University of Malta, and read for his Master’s Degree at the University of Warwick, UK, specialising in International Monetary Economics and International Trade.
Photo: Melvin Bugeja/Central Bank of Malta
