Prime Minister Bruce Golding says Government is trying to renegotiate financing terms on its locally held debt. - File

The Bank of Jamaica cut rates again Thursday, a week behind its last adjustment, in a move designed to bring down the cost of funds for the Government, analysts said, but they also took it as further evidence of a new agreement on interest rate policy under the borrowing facility being negotiated by Government.

The rate cut of 150 basis points across the board now prices BOJ tenors within a range of 14.5 per cent to 19 per cent.

The signal rate is now two 160 basis points below the benchmark six-month treasury bill which yielded 20.6 per cent at last week's auction.

The news announced at market opening helped send the stock market into retreat, which in a flat performance, gave up 2.6 points at the end of the trading day on volumes of just under 1.25 million units - representing $15 million of wealth - and with only 10 stocks trading.

The central bank said the new rate cut was linked to improvements seen in the money market after Friday's one-point reduction.

Few analysts were willing to speak on the central bank's decision, though one questioned why the BOJ would choose to amend rates again in such a short period, saying it was bound to make investors jittery because of the value that will be eroded from their portfolios as market rates trend down in line with the central bank's signal.

But as PanCaribbean noted in an email to shareholders, each point-reduction in interest rates could save the treasury $3.3 billion in servicing charges on its variable debt.

The rate cut also comes at a time when the Bruce Golding administration is negotiating a restructuring of its commercially held debt. Golding said Wednesday the terms were being worked out with banks and financial institutions, noting that getting it done hinged on whether financial institutions can convince investor clients to take the new deal being offered.

The public domestic debt hit $677 billion in June among a total debt stock that has climbed above $1.2 trillion.

"We can't repudiate the debt, nor can we unilaterally alter the terms and conditions of the debt," said the prime minister at a media briefing.

"That would have to come from voluntary adjustments that are agreed to by the holders of the debt. They will indicate that that also involves the concurrence of the persons on whose behalf they hold that debt. Those discussions are continuing," Golding explained.

A breakout of the locally held debt by creditor is split $6.47 billion in loans from commercial banks, $119 million of loans from public sector entities; another $460 million is held by bondholders; $196 million is in the form of local registered stock; and $3.95 billion in treasuries.

The external debt has grown to US$6.3 billion, the majority $4.2 billion of which is in the hands of private creditors, chiefly bond holders.

BOJ in a statement announcing the rate cut said it expects inflation to come in below its original fiscal forecast of 11-14 per cent, and that its foreign exchange reserves were "adequate" now that demand had softened.

The forex market has been stable for several months, leading BOJ to conclude that headline inflation, which includes core prices as well as those for food and energy, could continue to trend down.

Similar signal

Scotiabank Jamaica will adjust its base lending rate August 3 to 20.5 per cent, in response to last Friday's rate cut. National Commercial Bank of Jamaica has offered no similar signal.

"There are no discussions at this time," said corporate spokeswoman Sheree Martin, senior assistant general manager for group marketing and communications.

The market is now speculating, said one New Kingston-based research manager, that by yearend BOJ would have cut as much as five points off interest rates to satisfy conditionalities being negotiated with the International Monetary Fund for a US$1.2 billion facility.

The central bank has already implemented a 2.5 point reduction with the last two adjustments.

The market knew from last week that more cuts would have been made, but not when.

Brokers now anticipate that more investor funds will begin flowing to the stock market as yields decline.

business@gleanerjm.com