( L - R )Bernanke and Crowl
Jamaica's market analysts yesterday wel-comed the decision by the United States Federal Reserve to halt a more than two-year string of interest rate rises, saying that the action by the Fed is good for the island and other emerging markets.
"The local market should begin to look appealing," said Patrick Cowl, funds and research manager at the money management company, Barita Investments, some of whose customers had grown accustomed to the regular 25 per cent basis point hikes by the U.S. central bank. "The money will be staying here."
In yesterday's decision, the Fed held its benchmark rate steady at 5.25 per cent while it gauges whether a slowing economy will keep inflation in check, pausing a cycle that had taken the rate steadily higher in 17 successive hikes since mid-2004.
Potential impact
The move came in the face of recent economic indicators that have pointed to a downshift in the U.S. economy, led by a cooling housing market. But wages and prices continue to rise and the Fed suggested it could resume lifting borrowing costs if inflation proves tenacious.
"Inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand," the Fed said in a statement issued after the meeting. "Nonetheless, the committee judges that some inflation risks remain," the central bank added, saying any further rate moves would depend on the outlook for prices and growth.
As the Fed meeting began, the government reported that growth in second-quarter productivity, or hourly output per worker, slowed to a 1.1 per cent annual rate from 4.3 per cent in the first quarter. The key reason was a 4.2 per cent jump in unit labour costs, the fastest since the end of 2004 and well above the first quarter's 2.5 per cent - a reminder of inflation's durability despite a moderating expansion.
In Jamaica, whose economy is significantly affected by events in the United States, an upward movement in American interest rates not only has potential impact on the cost of servicing the country's US$5.6 billion foreign debt, but on domestic interest rates.
Higher rates abroad may pull domestic investors, tightening liquidity here.
Higher U.S. rates also depress yields on Jamaican bonds, which traded firm yesterday with yields ranging from 4.6 to 6.32 per cent, making them less attractive on foreign money markets. It is in that context that Clay Moodie, vice-president for treasury operations at the investment bank, Dehring, Bunting and Golding, embraced yesterday's action by the U.S. central bank.
"It should be good for us, especially for our bonds," said Moodie. "As a matter of fact, it should be viewed as positive for emerging markets in general. Bond prices have been languishing for some time because U.S. rates have been moving north for some time and the premium on holding Jamaican bonds wasn't that appealing."
He expected Jamaican bonds to start rallying, followed by increased activity in the equities market.
"Prudent investors anticipated this [news] and I saw some buying appetite return to the market last week after months of being inactive," he said. "Stocks and bonds should react positively."
Being creative
But according to Barita's Crowl, Jamaican financial companies will have to begin packaging attractive products to entice investors who may begin to have second thoughts about heading north with their cash.
"The challenge to the local financial industry is to be creative by looking to the north to copy and tailor some of their products to suit our markets rather than feed investors with the same diet of bonds and equities," he said.
- Reuters and Gleaner reporters.
