Sabrina N Gordon, Business Reporter

Derick Latibeaudiere

The Bank of Jamaica, in a pre-emptive move to mop up the cash it expects to flood the market at Christmas, has increased the interest rates on its certificates of deposit - its tool for signalling direction on rates.

The move comes against continued depreciation in the exchange rate, which breached the $78 barrier against the United States dollar in trading Tuesday.

The severity of the increase has raised concerns in the market and among businesses for which the cost of capital will become more expensive.

Reviewing lending rates

Financial houses have already signalled that they will be reviewing lending rates, while the Private Sector Organisation of Jamaica has questioned the central bank's sagacity, saying in a statement that it would likely put "more pressure on an already weak real economy at a time when the global economic crisis is placing severe pressure on Jamaica".

The central bank said it had to act now before certain BOJ securities mature and flood the market with cash in three weeks.

The rate hikes, which affected all six CD tenors, ranged from 2.65 per cent on the 30-day instrument, to 7.3 per cent on the one-year.

The instruments now pay returns ranging between 17 per cent and 24 per cent.

The only other time the central bank's adjustment of signal rates was that drastic - and was even moreso at the time - was the combined two-to-one-point adjustments on open-market instruments in March 2003.

"It is some statement by the monetary authority, given the seriousness of the perceived dislocation in the market, and they are acting to prevent that," said Errol Gregory, economist, of the current action.

The new rates took effect December 1.

"As we enter the silly season, the bank wants to show that it is a different Christmas and ensure the stability of the dollar at a time when there is increased demand," he added.

Year to date, the dollar has lost 10.5 per cent of its value, closing at $78.04 on Tuesday. Within the September quarter, the central bank sold a net US$206.5 million to augment supplies of hard currency, maintaining its policy of intervention to keep the dollar stable.

In recent months, the foreign reserves have been depleted by US$400 million to US$1.8 billion.

"I think the move was deemed to be necessary to stem a rapid slide in the Jamaican dollar against the US dollar; however, high interest rates will stifle growth in an economy that is already showing signs of zero to negative growth," said Dean McDonald, vice-president portfolio management and research at First GlobalFinancial Services.

PSOJ, which met Tuesday with Finance Minister Audley Shaw and central bank governor Derick Latibeaudiere, has asked that the BOJ consider the current rate hike as a short term measure.

Jamaica is anticipating foreign exchange inflows from donor agencies in January, which analysts suggests would be a good time for the BOJ to reduce rates.

"With the money to come in from the IDB and pick-up in tourist arrivals, then hopefully the central bank will be in a position to reduce the substantive increase in rates," said Gregory.

Rates adjusted five times

Since the start of the year, the central bank has adjusted interest rates five times, at a time when other central banks are cutting theirs, and with no indication as to when Latibeaudiere might choose to reverse direction.

"It is difficult to say at this time,"said McDonald.

"Jamaica is a highly import-dependent economy and therefore a weak Jamaican dollar creates pricing pressures on the raw materials and other products purchased overseas," he said.

sabrina.gordon@gleanerjm.com