LATIBEAUDIERE

Jamaica's central bank moved aggressively yesterday to shore-up the island's wobbly currency, floating a short-term CD with its interest rate 3.5 per cent higher than its most recent offering, and announcing that it would jack up, by two per cent, the amount of deposits that financial institutions would have to park with it.

This effort by the Bank of Jamaica, to limit the amount of cash institutions have to lend, comes into effect on December 3, a day after the 20.5 per cent CD is due to mature.

Subscriptions close today.

It will mean an increase in the liquid-asset requirement of commercial and merchant banks, as well as building societies, from 23 per cent to 25 per cent, with the cash-reserve portion moving from nine to 11 per cent.

The central bank said its action was "to remove liquidity overhang and to preserve order in financial markets".

It warned that it could hike the ratios even more - possibly by three more points - but did not say when, prompting analysts to theorise that it was a declaration of a draconian intent to drive good behaviour, rather than a plan on which to follow through in the near term.

The Jamaican dollar has depreciated against the greenback by more than five per cent over the past month, triggered, initially, by margin calls by US investment banks on local brokerage houses, who had used declining Jamaican government bonds to back loans.

The Jamaica dollar closed yesterday at J$77.14 on the spot market, down three cents for the day, and close to a dollar lower than the $76.29 spot price at October 31.

But the authorities here say that the slide of the Jamaican dollar has been exacerbated by speculative pressure by market players, unconvinced of the central bank's ability to defend the currency and the capacity of the administration to borrow abroad to cover fiscal gaps and to ensure a roll-over of foreign debts that become due early next year.

The government worries, too, that a currency decline will unleash a new round of hyper inflation and drive wage demands.

"The Bank of Jamaica had to hike up the rate dramatically to attract investors and regain confidence in Jamaican dollar investments," said Michelle Hirst, research manager at the brokerage house, Stocks and Securities Ltd.

The CD, whose tenor is less than a month, was opened to primary dealers and commercial banks, and its annualised interest rate was 3.5 per cent of the latest government treasury bill issued in October at an average yield of 16.96 per cent.

"If attractive enough, it (the CD) will encourage those who hold US dollars to convert to Jamaican dollars," said Dean McDonald, vice president for portfolio management and research at First Global Financial Services.

The attempt at stiffening the ramparts around the Jamaican dollar follows a series of earlier moves by the authorities to strengthen the currency and build market confidence.

For example, the central bank has in recent months spent over US$400 million of its reserves, inclusive of loans to brokers hit by margin calls, to defend the local currency.

Interest rates raised

Additionally, the central bank raised interest rates on its open market instruments by 65 to 120 basis points on October 17 when the JMD was in steady decline and unfazed by the cash that the central bank was then throwing at the market to stabilise demand.

And only last week, the government issued a 11.5 per cent US indexed bond that raised approximately J$6.8 billion.

But with the market still liquid with Jamaican dollars, the authorities clearly believe that these measures were not enough, hence the CD offer and the tighter liquid asset ratios on banks.

Analysts argued that the upward the sharp movement in the liquidity requirement suggested a graver concern among the authorities that the forward purchases of foreign exchange by businesses could undermine inflation targets, now set at between 15 per cent and 17 per cent for the fiscal year.

"It may be that with the latest round of forex fall and talk of the business sector not wanting to cut prices, even with the sharp decline in world market prices, that BOJ is ensuring that the business sector doesn't use forward rates to price goods, negatively affecting inflation," said John Jackson, the business analyst and publisher of the magazine, Investors' Choice.

While analysts predicted a robust take up of the central bank's CD, they were largely cautious about the longer term effect of the central bank's measures.

"It is critical to see what effect this has on the marketplace," said Stocks and Securities' Hirst.

"The indexed bond did not reduce the demand for US dollar substantially," she said.

"If this does not assist considerably over the next two weeks then it continues to show the fear/demand for the US dollar in the marketplace."

sabrina.gordon@gleanerjm.com