On Tuesday, the Bank of Jamaica (BoJ) reduced interest rates on open market instruments. In a press conference on Thursday, the central bank
governor, Derrick Latibeudiere, in announcing a stabilised
inflation rate in December (after the post- 'Ivan' spike), said, "The bank expects the normalisation of inflation realised in December to continue, and indeed accelerate. Consequently, we expect inflation to fall sharply in the March
quarter." Major United States ratings agency, Bear Stearns, has reacted positively to the reduction in rates and has endorsed the BoJ's actions. The following excerpt is from their recently-published Emerging Markets Sovereign Journal Weekly:
"THE BANK of Jamaica lowered its policy interest rates this week by 30-50 basis points across its curve. Rates now range from 13.5 per cent (30 days) to 15 per
cent (one year). The easing bias maintained by the BoJ is positive for the credit, in our view, and somewhat surprising. With the Fed now clearly entrenchd in a tightning cycle, we have been surprised
at the BoJ's ability to continue pushing rates lower while
maintaining currency stability.
LOCAL MARKET CONFIDENCE
Local market confidence has been supported by a strong fiscal effort resulting in falling (but still significant) fiscal deficits, and a positive medium-term growth outlook based on a robust investment outlook for key sectors such as tourism and bauxite alumina. The Jamaican dollar has been extremely stable for the past eight months, despite significant shocks such as ongoing high oil prices and two destructive hurricanes.
In its quarterly statement, the BoJ hedged itself by sounding a cautious note about future rate cuts, citing the Fed rate cycle and oil prices, but the policy bias, in our view, remains one of easing.
This should be positive for the external bonds, but Jamaican bonds have outperformed significantly in 2005, following their massive outperformance of 2004 (our Jamaican bond composit was up 26 per cent in 2004 and is up 6.4 per cent thus far in 2005).
Next week, the BoJ will release its net international reserve level for January. Expect the level to remain above 1.8 billion.
