Short-term excess liquidity continues to increase

Excess liquidity in the banking system continued to increase in the week under review. This was mainly due to the sale of foreign currency against the Maltese lira by the credit institutions to the Central Bank of Lm9.8 million, net maturing Treasury bills totalling Lm4 million and government direct credits amounting to Lm2.5 million.

Partially offsetting this increase in liquidity was a negative net clearing of cheques amounting to Lm6 million and an increase in currency in circulation of Lm1.1 million.

Last Friday the Central Bank conducted the usual seven-day term-deposit auction to address this excess liquidity. The amount absorbed from the banking sector was Lm7.7 million more than the Lm65.9 million which matured on the same day.

As a result of the auction, the credit institutions' outstanding term deposits with the Central Bank amounted to Lm73.6 million. The rate resulting from the latest absorption auction remained unchanged at 3.20 per cent, being the floor of the interest rate band (3.20-3.25 per cent) at which the Central Bank conducts its absorption auctions.

Interbank activity in the week under review increased substantially to Lm16.3 million, an increase of Lm8.6 million from the previous week's level of Lm7.7 million. Part of this amount, Lm7.5 million, was transacted in the two-week tenor. The rest were effected in the one-week and one-month tenors.

Rates in the two-week tenor increased by 2.4 basis points, whereas the one-month tenor rate decreased by two basis points. On the other hand, the rate for one-week tenor remained practically unchanged.

In the primary market, the Treasury invited tenders for 91-day Treasury bills to mature on January 20, 2006. Although Lm36.3 million worth of bids were submitted, only Lm12 million were accepted by the Treasury, reflecting the government's prevailing strong cash position. Given that during the week under review Lm16 million worth of bills matured, the outstanding balance of Treasury bills decreased by Lm4 million, from Lm189.8 million to Lm185.8 million.

The latest three-month rate resulting from this auction was 3.2396 per cent. This was 0.9 basis points lower than the previous 91-day rate for bills issued the previous week. The latest rate reflects a bid price of Lm99.1988 per Lm100 nominal.

Today, the Treasury receives applications for 182-day bills to mature on April 28, 2006.

Turnover in the secondary market remained low as in the previous week and amounted to only Lm0.2 million. All trading was effected by the Central Bank in its role of market-maker.