The banking system experienced a decline in liquidity for the second week in a row. An increase in the treasury bills holdings of credit and financial institutions of around Lm4.6 million, following net purchases from the primary market, and a shortfall in the reserve deposit account that banks are obliged to hold with the Central Bank were the major factors that induced this decline in liquidity.
Moreover, during the week under review, the banking system experienced an outflow of funds towards the government, mainly due to VAT payments. This was partly counterbalanced with payments of social security benefits, which amounted to Lm1.3 million.
Notwithstanding this decline in liquidity, the banking system still had ample excess funds on Friday. As a result, the Central Bank offered credit institutions a 14-day term deposit auction to absorb this extra liquidity.
A total of Lm62.8 million was absorbed in this auction, Lm15.1 million less than the amount that matured on the same day. As a result, the volume of term deposits held with the Central Bank declined from Lm102.9 million to Lm87.8 million.
The weighted average rate resulting from the auction was 2.95 per cent, which represents the floor of the interest rate band applied in operations for 14-day funds.
Interbank market trading remained subdued in the week under review with only one deal being transacted in overnight tenor. The transacted rate was 2.9 per cent, which was 6.9 basis points higher than the previous week's rate.
In the primary market, the government invited tenders for 364-day treasury bills. In total, Lm16.96 million worth of bids were submitted, from which Lm7.96 million were accepted. Given that Lm3 million treasury bills matured on the same day, the level of outstanding treasury bills increased by Lm4.96 million to Lm252.5 million.
The 364-day primary treasury bill rate remained virtually unchanged at 2.9675 per cent, which is 0.08 of a basis point higher than the previous rate, dealt on August 13. This new rate represents a bid price of Lm97.1257 per Lm100 nominal.
Today, the Treasury will receive bids for 182-day treasury bills to mature on April 1, 2005, and for 364-day treasury bills to mature on September 30, 2005.
For the following week, the Treasury will invite bids for 273-day bills to mature on July 8, 2005.
Turnover in the secondary market increased somewhat from the previous week. In fact, during the week reviewed a total of Lm1.25 million was transacted, compared to the Lm0.19 million of the previous week.
The bulk of these deals, Lm1.1 million, were conducted between credit and financial institutions, while the remaining Lm0.15 million were conducted with the Central Bank in its role as a market maker.