Surplus liquidity continued to characterise the banking sector in the week under review, albeit at a slightly lower level than the previous week. This marginal decline was attributable to the net issuance of treasury bills to the banking sector and other investors amounting to Lm16.4 million as well as to Lm2.6 million worth of net payments through the cheque clearing system.

Partially counteracting these outflows from the banking system was a Lm4.3 million decrease of currency in circulation and Lm1.9 million government payments in direct credits relating to dividends and invalidity pensions.

To address this excess liquidity, the Central Bank of Malta on Friday held its usual 14-day term deposit auction, absorbing Lm17 million from the banking sector. This was Lm4 million lower than the Lm21 million worth of term deposits maturing on the same day. Thus, outstanding term deposits held by credit institutions at the Central Bank decreased from Lm130.3 million to Lm126.3 million. This auction was carried out at a rate of 2.95 per cent, being the floor of the interest rate band (2.95 to three per cent) at which the Central Bank conducts its term deposit auction.

Unlike the previous week, interbank market activity picked up somewhat in the week under consideration. Two deals, totalling Lm3 million, were transacted in the overnight tenor at a weighted average rate of 2.89 per cent. The latest rate fell by 5.45 basis points from the 2.9445 per cent effected in March 2004.

In the primary market, the Treasury invited tenders for 91-day treasury bills to mature on July 16. The volume of bids submitted amounted to Lm34.1 million, which exceeded the Lm22 million issued by the Treasury. Given that total maturing treasury bills amounted to Lm7 million (which includes an amount of treasury bills that belonged to the Central Bank in its role of market maker), the outstanding bills' total rose by Lm15 million, from Lm259 million to Lm 274 million.

The primary treasury bill rate for the three-month auction was 2.9154 per cent, which is slightly higher (0.11 basis points) than the previous rate of 2.9143 per cent. The latest rate reflects a bid price of 99.2784 per Lm100 nominal.

Today, the Treasury will receive applications for 91-day bills to mature on July 23. Next week, the Treasury will receive tenders for 91-day treasury bills to mature on 30 July 2004.

There was a substantial rise in treasury bill secondary market activity in the week under review. The total transacted amounted to Lm4,823,000, with the bulk of trading dealt outside the Central Bank, whose activity in the secondary market as market maker was limited to purchases amounting to Lm73,000.