The level of liquidity in the banking sector increased slightly in the week under review. The main factors inducing this rise were government payments in direct credits of Lm2.9 million mainly relating to retirement pensions, the purchase of Lm1.5 million worth of foreign currency against Maltese lira by the Central Bank from credit institutions as well as net receipts through the cheque clearing system of Lm1.4 million.
Furthermore, there were Lm1.7 million net maturing treasury bills. Partly mitigating these liquidity-enhancing factors was the fact that credit institutions started the week under review with a shortfall in the reserve deposit accounts which they are legally bound to hold with the Central Bank. There was also an increase of Lm1.2 million currency in circulation.
To absorb the surplus liquidity in the banking system, the Central Bank held its usual 14-day term-deposit auction on Friday. During this auction, an aggregate of Lm53 million was absorbed from the banking sector, or Lm3.1 million higher than the Lm49.9 million worth of term deposits maturing on the same day.
As a result, outstanding term deposits held by credit institutions at the Central Bank increased from Lm114.4 million to Lm117.5 million. The rate resulting from the latest auction remained at 2.95 per cent, being the floor of the interest rate band (2.95 per cent to three per cent) at which the Central Bank conducts its term deposit auction.
Activity in the interbank market was subdued in the week under consideration. In fact, turnover amounted to only Lm500,000 as opposed to the aggregate of Lm16.3 million worth of deals transacted the week before. One deal was effected in the one-week tenor at 2.96 per cent, up by one basis point from the previous rate transacted on July 16.
In the primary market, the Treasury invited tenders for 273-day treasury bills to mature on April 22, 2005. During this auction, the Treasury accepted Lm15 million out of Lm39.3 million worth of bids submitted.
Given that the volume of maturing bills amounted to Lm17 million (which included Lm300,000 treasury bills which the Central Bank had bought in the secondary market), the outstanding stock of treasury bills decreased by Lm2 million, to Lm268.8 million from Lm270.8 million.
The primary nine-month treasury bill rate resulting from this auction was 2.9620 per cent. The rate was up by 1.36 basis points over the previous 2.9484 per cent for bills issued on June 25, 2004. The latest rate reflects a bid price of Lm97.8326 per Lm100 nominal.
Today, the Treasury will receive applications for 91-day bills to mature on October 24.
Turnover in the secondary market abated in the week under review. Total transactions amounted to only Lm512,000 against the Lm4.3 million traded the week before. All deals were effected by the Central Bank in its role as market maker.