BOJ hikes interest rates a third time - Move to tackle inflation, strengthen dollar

Published: Friday June 27, 2008

The Bank of Jamaica yesterday jacked up interest rates by half a percentage on benchmark instruments, a move which it said was aimed at taming the inflationary pressures that have squeezed the economy since the start of the year.

The action - which pushed 30-day certificate of deposits to 14 per cent and one-year instruments to 15.5 per cent - came during a week in which the central bank has intervened significantly in the foreign exchange market to shore up the Jamaican dollar against other currencies.

The dollar closed yesterday at $71.91, a two cents depreciation in a day.

Rise in prices

"The prime impetus behind the acceleration in inflation over the past six to eight months has been the sharp rise in prices of internationally traded food and petroleum products," the BOJ said in a statement posted on its website yesterday.

"If left unchecked, this trend will lead to further adjustments in the prices of domestic goods and services even when the prices of internationally traded goods recede."

It's the third adjustment in the signal rates by the central bank year to date in defence of the currency and to contain inflation.

Consumer prices in Jamaica rose 16.8 per cent last year, nearly triple the 5.6 per cent of the previous year.

The central banks' target for inflation, announced after the first two rate hikes, is 14.5 per cent.

The new Jamaica Labour Party (JLP) had projected single digit inflation when finance minister Audley Shaw presented his budget in April.

But price movements of 2.4 per cent in May pushed inflation for the first five months of the calendar year to 9.4 per cent, or 3.9 per cent for the first two months of the fiscal year.

Yet some market analysts sensed heavy jitters, if not panic, on the part of the central bank's response to the market conditions, given the possibility of strong foreign exchange inflows in the near-term.

"The BOJ move could be viewed in some quarters as a shock, especially since there should be US dollar liquidity coming to the market over the next few weeks from the Lascelles/Angostura payment as well as the RBTT/RBC payment," said Vernon James, vice president corporate client services at the brokerage house, NCB Capital Market.

James' references to currency inflows related to the more than US$300 million that Trinidad and Tobago's Angostura Ltd say it will pay shareholders of the Lascelles deMercado Group at the end of April, the second tranche of the US$9.25 a share at which it is acquiring the Jamaican firm.

Jamaica shareholders of RBTT Bank will benefit from its purchase by Royal Bank of Canada, a deal that is now being closed.

While the sharpness of the BOJ's rate rise might have been surprising, the fact that an upward movement came was not unexpected some some quarters.

"I think the market may not have been expecting the increase at this particular time, but it certainly isn't a shock to us," said Jason Morris, senior investment analyst at Jamaica Money Market Brokers (JMMB), the bond traders.

JMMB have been warning recently about the potential impact of inflation and the pressure that was falling on the Jamaica dollar, which closed trading yesterday at J$71.76 to US$1.

The local dollar is in a 'dirty' float against the greenback.

On Wednesday, BOJ intervened in the foreign market, selling US dollars to dealers at $71.76. The rate to end-users was J$71.81 for US$1.

There was a similar intervention a week earlier after the Jamaican currency had slipped to J$71.77.

Morris believes that the central bank's move, will in the short-run, have the desired impact: pulling liquidity from the US dollar market, thus stabilising the exchange rate and tamping down inflation.

But there are potential for negatives.

"It has negative implications for the fiscal deficit, debt ratio and expected growth," Morris warned. "In fact, at our last economic seminar we (JMMB) also pointed out in our investment strategy report that we expected growth to be well lower than what the government is projecting."

Shaw's growth target is three-and-half per cent.


Source:
Sabrina Gordon
Jamaica Gleaner
http://www.jamaica-gleaner.com/gleaner/20080627/business/business2.html
sabrina.gordon@gleanerjm.com