Understanding the Impact of Inflation on Financial Services Products
MARCH 10, 2023

By Antonio Battaglino - Senior Analyst, Conduct Supervision, MFSA

Whilst a moderate level of inflation is actually an indication of a healthy and growing economy, after a long stretch of relatively stable prices, Europe has been experiencing a period of increasing levels of inflation during the post-COVID era, which was further enhanced by an unprecedented energy crisis due to the war in Ukraine.

While Malta is registered to have among the lowest rates of inflation across the European Union, standing at 6.8% in January 2022, this is still higher than the desired two per cent that the European Central Bank is traditionally targeting for the euro area over the medium term.

Consumers of financial services need to be aware that rising levels of inflation not only have an impact on the purchasing power of their regular salary but can also affect their financial decisions.

Bank account holders should understand that inflation has an effect on the real value of their savings. If the inflation rate exceeds the interest earned on a savings or deposit account (which could potentially be increased during periods of inflation), the purchasing power of these funds will essentially decline.

When it comes to bank loans, it is imperative for consumers to comprehend the differences between fixed and variable interest rates, especially during times of rising inflation. With a fixed-rate loan, the payments that are made throughout the repayment period are of a fixed amount, whereas with variable-rate loans, the amount paid for the regular payments fluctuates as the benchmark rate changes. When the benchmark rate goes up or down, payments tied to variable-rate loans also increase or decrease accordingly.

The same mechanism concerning fixed and variable rates applies to investments in bonds, except that in this case the investor is the lender, and the institution, organisation or government issuing the bond is borrowing the investor’s money.

When consumers invest in fixed interest rate bonds, they will always receive the same amount in the form of interest. When increasing inflation comes into the picture however, one should consider that the real value of the earned interest is actually less than it was before. Realistically, this means that with the same amount of earnings from their investment today, they can actually purchase fewer goods or services when compared to what they could buy yesterday.

Some insurance products, such as home insurance, are also impacted by inflation. Policyholders may be faced with a situation whereby they become under-insured. This  happens when the rebuilding value of the property or the replacement value of the contents within the property rise, but the sum insured covered in the policy is not adjusted accordingly.

This can typically occur in situations of high inflation, where the costs of the material used to repair the damage are also rising. In the event of a claim this can be particularly detrimental to the policyholder since the insurer will possibly not cover the full amount of the claim and will only reimburse the claim to an amount which is proportionate to the sum insured.  In this regard, consumers are encouraged to review their insurance policies, in particular their buildings and home contents policies, and consider reviewing the amount of the sum insured from time to time.

Being the single regulator of financial services in Malta, the Malta Financial Services Authority is also responsible for promoting financial literacy and enhancing consumer protection among the Maltese general public. In its latest consumer education campaign, the Authority is specifically focusing on raising awareness on the effects of the rising level of inflation on people’s financial decisions related to investments, savings, loans and insurance products.

More information on the subject is available within the MFSA’s online consumer hub at www.mfsa.mt/inflationexplained/.