The level of surplus liquidity in the banking sector exhibited a marked decrease in the week ended May 21. This decline was mainly attributable to the fact that credit institutions started the first week of the reserve requirement maintenance period (May 15 - June 14, 2004) with a shortfall in the reserve deposit accounts which they are legally bound to hold with the Central Bank of Malta.
Moreover there were substantial deposit withdrawals associated with applications for the new issue of Malta Government stocks. Another liquidity-reducing factor was the net allotment of Lm5 million nominal worth of treasury bills.
Partly offsetting these outflows from the banking system were inward payments of Lm12.7 million in the form of direct credits mainly related to government salaries and the sale to the Central Bank of Lm14 million worth of foreign currency against Maltese lira by credit institutions.
On Friday, May 21, the Central Bank of Malta accordingly held its usual 14-day term deposit auction to absorb the excess liquidity. During this auction, an aggregate of Lm59.8 million was absorbed from the banking sector. This was Lm28.3 million less than the Lm88.1 million worth of term deposits maturing on the same day.
As a result, outstanding term deposits held by credit institutions at the Central Bank decreased from Lm128.8 million to Lm100.5 million, the lowest level this year. This auction was carried out at a rate of 2.95 per cent, being the floor of the interest rate band (2.95 per cent - 3 per cent) at which the Central Bank conducts its term deposit auction.
Activity in the interbank market increased in the week reviewed. In fact, from one transaction worth Lm0.3 million the week before, interbank deals during the survey period rose to Lm25.5 million. The overnight tenor, at a weighted average rate of 2.8495 per cent, was very marginally lower than the 2.85% dealt in the previous week. The weighted average rate for the one-week tenor dropped by 7.5 basis points, from 2.95 per cent (May 7) to 2.875 per cent. In contrast, the weighted average rate in the two-week term was marginally higher, by 0.41 basis points, than the previous 2.9633 per cent transacted earlier this month.
In the primary market, the Treasury invited tenders for 91-day treasury bills to mature on August 20, 2004, and accepted Lm10 million worth of bids, or some two thirds of the volume of bids submitted for this auction (Lm14.7 million). Given that total maturing treasury bills amounted to Lm5 million, the outstanding stock of treasury bills increased by Lm5 million, from Lm259 million to Lm264 million.
The primary treasury bill rate for the 91-day issue, after dropping by 25.1 basis points from 2.9060 per cent to 2.6555 per cent during the previous auction (when only 1.9 per cent of total bids were allotted), reverted back to 2.9011 per cent following the latest auction. This rate reflects a bid price of Lm99.2819 per Lm100 nominal.
Today, the Treasury will receive applications for 91-day bills to mature on August 27, 2004. Next week, the Treasury will hold an auction for 91-day bills to mature on September 3, 2004.
Activity in the secondary treasury bill market increased substantially during the week, to Lm11.6 million compared to the previous week's Lm358,000. The bulk of trading was effected outside the Central Bank and amounted to Lm11.4 million. The Central Bank's involvement in its role as market maker was very subdued during the week, with net purchases of Lm25,000.