Broad money increases as credit expands

- higher demand deposits, currency in circulation sees narrow money recover

The Central Bank of Malta reports that in May broad money, M3, increased as domestic credit expanded and the net foreign assets of the banking system continued to grow. M3, which consists of currency in circulation and residents’ deposits with the banking system, put on Lm20.7 million, or 0.7 per cent. Bank deposits denominated in Maltese liri accounted for almost the entire increase, as residents’ foreign currency deposits fell for the second consecutive month and currency in circulation rose slightly.

After having contracted in April, narrow money, M1, recovered in May, adding Lm6 million, or 0.9 per cent. Both its components expanded, with currency in circulation and demand deposits going up by Lm1.1 million and Lm4.9 million, respectively. An increase in corporate deposits accounted for most of the rise in demand deposits. The annual rate of growth of narrow money fell further, however, dropping to 3.1 per cent from 4 per cent in April.

Quasi-money continued to drive broad money expansion, rising by Lm14.7 million, or 0.7 per cent, with the annual growth rate accelerating slightly to 9.4 per cent. Savings deposits decreased by Lm8.3 million. The issue of corporate bonds towards the end of the month probably contributed to a drop in deposits belonging to households, which accounted for most of the fall. In contrast, time deposits expanded by Lm23 million, as personal deposits went up by Lm18 million.

As for the counterparts of monetary expansion, domestic credit increased by Lm34.4 million after modest growth during the previous month. As a result, the annual rate of credit growth, which had been on a steady downward trend since the autumn, accelerated to 5.6 per cent.

Net claims on Government, which went up by Lm28.9 million, or 5.7 per cent, accounted for the bulk of the increase in domestic credit. The banking system added to its holdings of Treasury bills and Government deposits with the Central Bank fell. At the same time, claims on the private and parastatal sectors expanded by Lm5.4 million, as additional credit to the private sector, especially households, outweighed a drop in loans and advances to public sector enterprises. Consequently, the annual rate of growth of claims on the private and parastatal sectors rose by one percentage point to 2.6 per cent after having fallen since the beginning of the year.

In contrast the net foreign assets of the banking system expanded at a markedly slower pace, rising by just Lm7.5 million in May. Although the annual rate of growth dropped by ten percentage points to 17.6 per cent, this mainly reflected a sharp rise recorded in May 2001.

After having contracted for two consecutive months, the net foreign assets of the Central Bank increased slightly, adding Lm1.5 million. Purchases of foreign exchange from the rest of the banking system outweighed foreign currency swaps and customer payments. Meanwhile, the net foreign assets of the rest of the banking system expanded by Lm6 million as the international banks’ net holdings rose.

Other items (net) consist of the non-monetary liabilities of the banking system, including capital and reserves, less its other assets such as fixed assets and interest receivable. In May, these items expanded by Lm21.1 million, or 3.1 per cent, largely as balances in suspense accounts increased pending the allocation of corporate bonds that were issued during the month.