Broad money expands, narrow money falls

The Central Bank of Malta reports that broad money, M3, expanded further in January under the impact of a rise in domestic credit. Broad money, which is made up of currency in circulation and residents’ deposits with the banking system, expanded by Lm17.6 million in January such that the annual rate of growth of M3 decelerated to 7.7 per cent from 8.4 per cent in December 2001. Both households and private firms continued to build up their holdings of bank deposits during the month.

In line with the normal seasonal pattern, narrow money, M1, fell by Lm11.9 million, or 1.9 per cent, with the annual rate of growth dropping by nearly four percentage points to 2.7 per cent as a result. Currency in circulation decreased by Lm5.1 million, almost reversing entirely the rise registered in December. At the same time, demand deposits contracted by Lm6.8 million, with deposits belonging to households accounting for around half the drop.

In contrast, quasi-money continued to increase robustly, adding Lm29.4 million, or 1.4 per cent. As a result the annual rate of growth accelerated to 9.3 per cent. Savings deposits expanded for the fourth consecutive month, adding Lm6.1 million, with foreign currency deposits accounting for two-thirds of the increase. Whereas households added to their Maltese lira savings deposits, the private corporate sector registered a notable increase in its foreign currency savings accounts. Following a small fall in December, time deposits resumed their upward trend, gaining Lm23.3 million, or 1.6 per cent. The increase was fairly evenly split between personal and corporate deposits, with deposits denominated in Maltese liri accounting for almost the entire rise.

As for the counterparts to monetary expansion, domestic credit expanded after having contracted during the previous two months, expanded as net claims on Government resumed growth. Domestic credit rose by Lm13.4 million, or 0.6 per cent. Nevertheless, the annual growth rate fell further, dropping by half a percentage point to 6.1 per cent.

With Government deposits with the Central Bank continuing to fall in January, the banking system’s net claims on Government expanded by Lm20.1 million, or 4.2 per cent, as credit institutions increased their holdings of Treasury bills. In contrast, claims on the private and parastatal sectors dropped by Lm6.7 million, lowering their annual growth rate slightly, to 4.5 per cent. Claims on public sector enterprises rose for the second straight month, adding Lm4.7 million, driven by lending to manufacturing and to the transport, storage and communications sector. However, claims on the private sector declined by Lm11.4 million, mainly as a result of lower credit to the "other services" sector and to private manufacturing.

As for the other determinant of monetary expansion, the net foreign assets of the banking system declined by Lm8 million in January, following three consecutive monthly rises, The annual rate of growth nevertheless accelerated to 12.5 per cent.

The Central Bank continued to add to its net foreign assets, which rose by Lm21.7 million, or 2.9 per cent, largely through net purchases of foreign exchange from domestic banks. As a result, the Central Bank’s net foreign assets showed a year-on-year gain of almost a quarter. Meanwhile, the net foreign assets of the rest of the banking system dropped by Lm29.7 million, or 9 per cent: those of the domestic banks contracted by a third, or Lm35.8 million, with around half the decline reflecting net sales of foreign exchange to the Central Bank. On an annual basis the net foreign assets of the rest of the banking system contracted by 8.6 per cent.