21 September 2005


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Central Bank’s operational framework aligned closer to that of the Eurosystem

On Thursday, 15 September, two changes regarding the Central Bank of Malta’s interest rate structure on its standing facilities and the auction tenor came into effect. The band between the Marginal Lending Facility and the Overnight Deposit Facility was reduced from 300 basis points to 200 basis points. Thus the Marginal Lending Facility rate was set at 4.25% or 100 basis points above the Central Intervention Rate (previously 150 basis points) while the Overnight Deposit Facility rate was set at 2.25% or 100 basis points below the Central Intervention Rate (previously 150 basis points). Another change is that the auction tenor was reduced from fourteen to seven days. These changes brought the local monetary policy operational framework closer to that of the Eurosystem.
Surplus liquidity in the banking system continued the upward trend experienced in the last few weeks. Credit institutions started the new reserve deposit maintenance period (commencing on 15 September) with an overall surplus in the reserve deposit accounts which they are legally bound to hold with the Central Bank of Malta. Consequently, in the week ended 16 September, the Bank conducted an absorption operation which started to take the form of a 7-day term deposit auction. An aggregate of Lm40.3 million was absorbed from the banking sector, Lm11 million more than the Lm29.3 million worth of term deposits that matured on the same day. As a result, the Bank’s outstanding term deposits increased from Lm54.2 million to Lm65.2 million. The rate resulting from this auction was 3.20%, being the floor of the interest rate band (3.20% - 3.25%) at which the Bank conducts its weekly absorption auctions.
During the week under review, interbank activity increased substantially, from Lm5.1 million worth of deals effected the previous week to Lm13 million. There was an increase of 3 basis points in the rate of the one-week tenor when compared to the previous week.

Treasury bill market
In the primary market, the Treasury invited tenders for 182-day Treasury bills to mature on 17 March 2006. From the Lm13.3 million worth of bids submitted, only Lm0.2 million was accepted by the Treasury, reflecting the relatively strong cash position of the Government during the period reviewed. Given that practically the same amount of bills matured during the week under review, the outstanding balance of Treasury bills remained unchanged at Lm186.7 million.
The latest six-month rate resulting from this auction was 3.2597%. This was 1.9 basis points lower than the previous 182-day rate for bills issued on 26 August 2005. The latest rate reflects a bid price of Lm98.4006 per Lm100 nominal.
On Tuesday, the Treasury received applications for 273-day bills to mature on 23 June 2006. For the following week, the Treasury will accept bids for 364-day bills to mature on 29 September 2006.
Turnover in the secondary market amounted to only Lm0.2 million. All trading was effected by the Bank in its role of market-maker.



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