Sabrina N. Gordon, Business Reporter

The Bank of Jamaica (BOJ), in a not-so-surprising move to the market, has increased interest rates in the face of increased pressure on the foreign-exchange rate, with financial institutions increasing their demand for the currency to maintain their margin accounts.

The increases were effected Friday right across the board on all tenors 30-day to 365-day instruments, and came two days after the Jamaican dollar had crept through the $74 barrier against its major trading partner, the US currency.

demand for foreign exchange

The recent increase in demand for foreign exchange to pay down foreign liabilities has led the bank to reassess and to harmonise the structure of interest rates payable on its instruments, the central bank said in a news release.

The signal rates have gone up by 1.2 percentage points on the one-year repo, and by 65 basis points on the other five instruments.

Analysts expected BOJ governor Derick Latibeaudiere to reach for new arsenal, given that the local currency continued to depreciate even after the central bank had pumped liquidity into the market this week, with the usual stipulations on the price at which its primary dealers should sell those funds.

It was expected given that local broker repo rates were already higher than previous BOJ rates, said Mark Croskery, president and chief executive officer of Stocks and Securities Limited.

The market had priced this potential increase already, but as a result of this mornings (Friday) increase by BOJ, broker-to-broker rates have increased by about 10 to 20 basis points.

When Latibeaudiere last raised interest rates, it was under similar conditions of BOJ’s cash interventions failing to stabilise the foreign-exchange market.

“With money now more expensive and credit tight, it will assist in relieving some of the pressures,” said Delroy Josephs, vice-president of investment and trading at UGI Finance and Investments Limited.

The new rate on the 30-day tenor is 14.65 per cent, up from 14 per cent where it was set on June 26 of this year, the 120-day is at 15.15 per cent, up from 14.5 per cent, while the one-year is priced at 16.7 per cent, up from 15.5 per cent in June.

“The adjustment will bring rates offered by the central bank in line with yields applicable to Government of Jamaica Treasury Bills and other short-dated market instruments,” stated the Bank of Jamaica press release on Friday. The six-month T-bill auctioned by the bank in September yielded 15.35 per cent.

stability

“This rate increase would represent the latest in a series of appropriate attempts in ensuring stability of our markets and ease the recent slide of the local currency,” said Rex Shettlewood, senior research manager at Mayberry Investments Limited.

“This reduces but does not eliminate the likelihood of further rate increases for 2008,” he said.

Within the last couple of months, several financial institutions in the United States have failed, causing a ripple effect in markets globally.

This has led to uncertainty and instability in the local markets, which have seen declines on the Jamaica Stock Exchange and financial institutions exposed.

GOJ global bond prices have also reflected sharp declines as investors move away from riskier emerging market instruments.

special financing window

The BOJ last week announced a special financing window for local financial institutions, signalling that Jamaica was prepared to give help to institutions needing cash for increased payments to overseas creditors.

“Taken together, these policy changes will address the temporary gap in the foreign-exchange flows and maintain order in domestic financial markets,” said the BOJ, a point with which Croskery agrees.

“Confidence is a critical part in any market, and this needs to be worked on overall in the local economy at this time.”

He says, however, that the market is still jittery.

“Lack of confidence continues to be reflected in local bond and equity prices from an asset standpoint,” he said.

sabrina.gordon@ gleanerjm.com.