Liquidity in the banking sector rose in the week under review. The main factor contributing to this increase was the fact that credit institutions started the new maintenance period (July 15 - August 14) with an excess in the reserve deposit accounts which they are legally bound to hold with the Central Bank.
Further enhancing this surplus were inflows of Lm22.6 million in respect of the maturity of Malta Government Stock, government payments through direct credits totalling Lm14.2 million mainly relating to salaries and the sale by credit institutions of Lm4 million worth of treasury bills in the secondary market to the Central Bank.
Partly mitigating these liquidity-inducing factors was the net issuance of Lm4 million treasury bills as well as Lm3.1 million deposit withdrawals.
To absorb this excess liquidity, the Central Bank held its usual 14-day term-deposit auction on Friday. During this auction, an aggregate of Lm64.5 million was absorbed from the banking sector, or Lm34.9 million more than the Lm29.6 million worth of term deposits maturing on the same day.
As a result, outstanding term deposits held by credit institutions at the Central Bank rose from Lm79.5 million to Lm114.4 million. The rate resulting from the latest auction remained at 2.95 per cent, being the floor of the interest rate band (2.95-3.00 per cent) at which the Central Bank conducts its term-deposit auction.
Interbank market activity picked up in the week under consideration, increasing to Lm16.3 million from the previous week's level of Lm3.5 million. The bulk of trading was effected in the overnight tenor at a weighted average rate of 2.9499 per cent.
The latest overnight rate gained five basis points over the previous week's rate of 2.9 per cent. Only one deal was effected in the 1-week term, at a rate of 2.95 per cent, unchanged from that transacted on July 2.
In the primary market, the Treasury invited tenders for 28-day treasury bills to mature on August 13, 2004. During this auction, the Treasury accepted Lm26 million out of Lm36.5 million worth of bids submitted. Given that the volume of maturing bills (91-day tenor) amounted to Lm22 million, the outstanding stock of treasury bills increased by Lm4 million, from Lm266.8 million to Lm270.8 million.
The primary one-month treasury bill rate resulting from this auction was 2.9510 per cent, which reflects a bid price of Lm99.7742 per Lm100 nominal. It is worth noting that the last time the one-month bill had been auctioned was on July 19, 2002, when the rate had been set at 3.9999 per cent.
This sharp decline in the 28-day rate was mainly attributable to the fact that in the past two years, the Central Bank has cut its Central Intervention Rate four times, from four to three per cent.
Today, the Treasury will receive applications for 273-day bills to mature on April 22, 2005. For next week, the Treasury will invite tenders for 91-day bills to mature on October 29, 2004.
Turnover in the secondary market exhibited a marked increase in the week under review. In fact, total transactions amounted to Lm4.3 million against the Lm130,000 traded the week before.
All deals were effected by the Central Bank in its role as market maker.