The level of surplus liquidity in the banking sector experienced a sharp decline in the week ended on Friday. This was mainly attributable to the fact that the credit institutions started the first week of the reserve requirement maintenance period (November 15-December 14) with a shortfall of about Lm8 million in the reserve deposit accounts which they are legally bound to hold with the Central Bank of Malta.
Banks tend to address, at least partially, any shortfall or excess in their balances at the beginning of the maintenance period so as to avoid unnecessary adjustments later on.
There were also substantial deposit withdrawals connected with the allotment of the new issue of Malta government stocks to the wholesale sector. Liquidity was further reduced by the transfer of some Lm6 million to the government in respect of VAT payments. There was also a negative clearing of cheques amounting to Lm2.7 million. Furthermore, the Central Bank of Malta absorbed another Lm2.6 million against the sale of foreign currency to credit institutions. Partly offsetting these outflows from the banking system were net maturing treasury bills amounting to Lm3.9 million and a decline in currency in circulation of Lm2.2 million. Moreover, there were also direct credits of Lm2 million mainly related to social security benefits.
On Friday, the Central Bank of Malta held its usual 14-day term deposit auction. An aggregate of Lm6.8 million was absorbed from the banking sector, Lm45.7 million less than the Lm52.5 million worth of term deposits that matured on the same day. Thus, the level of outstanding term deposits held by credit institutions at the Bank decreased from Lm107.9 million to Lm62.2 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 per cent) at which the Bank conducts its term deposit auctions.
Three interbank deals were transacted in the week under review amounting to Lm5.6 million. One deal, totalling Lm3.6 million, was conducted for a 30-day tenor at 2.95 per cent, which is significantly higher than the previous one-month rate of 2.82 per cent, transacted on June 4. Another deal, amounting to Lm1.6 million, was effected in the seven-day tenor at 2.95 per cent. The other deal of Lm1 million was transacted in the 14-day tenor at 2.96 per cent. Interest rates in these two tenors remained unchanged.
In the primary market, the Treasury invited tenders for 91-day Treasury bills to mature on February 18, 2005. The amount of bids submitted totalled Lm24.2 million, of which, the Treasury accepted only Lm2 million. Given that Lm4.9 million worth of bills matured during the week under review, the outstanding balance of treasury bills decreased by Lm2.9 million, from Lm264.7 million to Lm261.8 million.
The latest three-month rate resulting from this auction was 2.954 per cent, slightly lower by 0.78 basis points from the previous 91-day rate for bills issued on November 5. This rate reflects a bid price of Lm99.2689 per Lm100 nominal.
Today the Treasury will receive applications for 364-day bills to mature on November 25, 2005.
Trading in the secondary treasury bill market increased from the previous week's level of Lm0.5 million to Lm3.3 million. The bulk of the deals were transacted outside the Central Bank of Malta.