By McPherse Thompson, Assistant News EditorTHE STABILITY in the foreign exchange market over the past weeks, as well as a substantial increase in tourism receipts for the first quarter of the calendar year have led the Bank of Jamaica (BoJ) to lower interest rates on its longer term reverse repurchase instruments.
Market players said the move was a positive one and may be the first of a series of downward adjustments that could help to stimulate growth in the economy.
In a release, the BoJ said the rates on instruments with maturities of between 180 days and 365 days have been reduced by between 150 and 300 basis points, effective yesterday. The rates on the 30-day to 90-day instruments remain unchanged.
The central bank said the adjustments were being made in the context of a period of sustained stability in the foreign exchange market. The decision was also supported by improved performance in the tourism sector, as reflected in the January to April statistics, which show a 24 per cent increase in visitor arrivals and a 14 per cent rise in earnings relative to the similar period in 2002, the BoJ said.
At the same time as it announced a reduction in interest rates, the BoJ also announced the issue of $300 million worth of 181-day treasury bills with an average yield of 28.46 per cent, to be dated tomorrow, June 26 and redeemed on December 24. The offer was oversubscribed by more than 300 per cent.
SHARP INCREASES
The BoJ's reduction in interest rates followed sharp increases in the entire spectrum of reverse repurchase instruments in March, following rapid declines in the value of the Jamaican dollar against its United States counterpart.
With the dollar then trading in the band of $56 to US$1, the BoJ moved to absorb Jamaican dollar liquidity, stunning the equities market and forcing investors to convert their US-dollar portfolios into Jamaican dollars.
However, the central bank's measure was short-lived as the dollar continued to plummet, reaching a high of $72 to US$1 over the next few weeks before Prime Minister P. J. Patterson initiated through the BoJ, an aggressive intervention campaign to bring stability to the market.
The reduction in interest rates and the appearance of stability in the foreign exchange market at this time notwithstanding, investment brokers said the jitters over the past two months have apparently influenced many to continue holding foreign currency in anticipation of a slippage, following last week's local government elections. At the close of trading yesterday, the average buying rate of the US-dollar was $58.71, while the selling rate was $59.05.
For Mark Walters, vice-president of treasury at Dehring Bunting & Golding, the reduction in the BoJ repo rates "has to be viewed in a favourable light, given that one of the concerns of the market was the impact any sustained high interest rate would have on the overall debt servicing cost, and based on the fact that the budget had contemplated a 19 per cent interest rate."
He said this may be the first of many adjustments leading to a continued downward movement in the BoJ repo rates. "That in itself is a good sign," he said. "How fast they will go, I think, will depend on a number of variables." Among those variables, Mr. Walters said, would be continued stability in the foreign exchange market and whether Jamaica would continue to see improvements in tourism arrivals, the expenditure side of the budget, as well as tax collection. If there are improvements in those areas, "the pace at which the BoJ adjust down the repo rates might be quicker," he said.
Mr. Walters explained that with respect to tax collection, "one of the key things the market is looking at now is the fiscal deficit, and to the extent that there will continue to be good news coming from the Government that the fiscal targets are being met, that will give greater confidence to the market. The greater confidence the market has in the ability of the Government to repay its debt, this will mean lower and lower interest rates."
