Central Bank monetary operations

Liquidity in the banking sector continued with its upward trend in the week under review. The rise was mainly fuelled by a number of transfers from the government to the banking sector, mainly, Lm4.6 million net maturing Treasury bills belonging to credit and other financial institutions, Lm2.5 million dividend warrants and Lm1.6 million invalidity pensions. Moreover, credit institutions accumulated some excess funds in their reserve deposit accounts, which they are legally bound to hold with the Central Bank of Malta. Cash withdrawals of Lm2.9 million and a negative clearing of cheques, which totalled Lm1.6 million, reduced some of this extra liquidity.

Accordingly, on Friday, 10 June 2005 the Central Bank of Malta conducted a term deposit so as to absorb these extra funds. A total of Lm23.7 million was absorbed compared to the Lm7 million that matured on the same day. As a result, the level of term deposits held with the Bank increased to Lm40.2 million, a level that was last seen in February of this year. The rate on these term deposits remained fixed at the current floor of 3.2 per cent.

Interbank market

Interbank activity decreased considerably in the week under review. In fact only one deal, amounting to Lm1 million, was transacted compared to the Lm11.8 million of the previous week. The deal was effected in the overnight tenor at a rate of 3.2 per cent, which represents a decline of 6.3 basis points from the previous rate transacted in May. This lower rate largely reflects the generous liquidity position that prevailed during the week.

Treasury bill market

In the Treasury bill market the government invited tenders for 28-day and 91-day Treasury bills. A total of Lm10.4 million bids were submitted – Lm5 million for the 28-day bills and Lm5.4 million for the 91-day issue – all of which were accepted. On the same day, Lm17 million bills matured. Consequently, the level of outstanding Treasury bills fell to Lm204.2 million.

Primary rates edged slightly upwards. The 28-day rate increased by 4.32 basis points to 3.254 per cent from the earlier rate dated 15 April 2005. The new rate reflected a bid price of Lm99.751. On the other hand, the weighted average 91-day rate was 3.2673 per cent, which is only 0.98 basis points higher than last week’s rate. This corresponded to a bid price of Lm99.192.

There was practically no activity in the secondary market for Treasury bills except for some negligible amounts that were transacted by the Central Bank in its role as a market maker for Malta government securities.