In the week under review, the excess liquidity of the banking system decreased, although it still remained at a very high level. This reduction in liquidity came about mainly because banks started the week with a shortfall in their reserve deposit accounts which they are legally bound to hold with the Central Bank of Malta.
Moreover, there were net payments by banks of Lm3.6 million effected through the cheque clearing system. These liquidity-reducing factors were partly mitigated by a decline in currency in circulation of Lm1.2 million and by sales of foreign currency to the Central Bank against Maltese lira, totalling Lm1.1 million.
Decreases in currency in circulation raise bank liquidity because the credit institutions' accounts are credited with the net amount of cash deposited.
Net sales of foreign currency to the Central Bank have the same effect.
In addition to these flows, the banking system's liquidity was also boosted by the maturity of Lm77 million worth of term deposits, which had been placed at the Central Bank in the term deposit auction of February 6.
In order to absorb this substantial amount of excess funds, on Friday the Central Bank conducted a term deposit auction. In this auction, credit institutions deposited Lm68 million, Lm9 million less than the amount that matured.
Consequently, the volume of term deposits held with the Central Bank decreased from Lm146 million to Lm137 million. The weighted average rate resulting from this auction remained unchanged at 2.95 per cent, which is the floor of the interest rate band used in the Central Bank's term deposit auctions.
As in the previous week, the interbank market was dormant during the week under review, once again reflecting the strong liquidity position of commercial banks.
In the primary market, the Treasury invited tenders for 91-day treasury bills to mature on May 21. The Treasury only accepted Lm5 million bids from a total of Lm18 million. This was practically a roll-over of the Lm5.2 million treasury bills that matured during the same week. As a result, the volume of outstanding Treasury bills decreased marginally to Lm225.1 million.
The weighted average rate resulting from this auction was 2.9471 per cent, which was 0.5 basis points higher than that of the previous week. This reflects a bid price of Lm99.2706 per Lm100 nominal. Today the Treasury will receive applications for 364-day treasury bills to mature on February 25, 2005.
In the secondary market for treasury bills, turnover remained subdued at Lm24,000. All transactions were conducted with the Central Bank in its role as a market marker.