Sun | Jul 15, 2018

Analysts: FED rate increase could cause further $J depreciation

Published:Thursday | December 17, 2015 | 12:00 AM

On December 4, the Jamaican dollar slid to an all-time low of J$120 to buy US$1, a month after Bank of Jamaica (BOJ) Governor Brian Wynter declared that the Jamaican dollar was no longer overvalued and had become less susceptible to unpredictable slippage.

Now, with a quarter-point increase of US interest rates yesterday, marking the end of a seven-year zero-interest-rate era of the US Federal Reserve, analysts are indicating that the local dollar could depreciate further in the medium term.

Ismail Erturk, senior lecturer in banking at the University of Manchester, said Jamaica should prepare for depreciation and high-interest-rate risk.

"Any rate increase in the US is very likely to put pressure on the Jamaican dollar in the medium term. The institutional investors of maturing bonds are likely to seek high yield and exchange-rate protection. This means likely higher interest rates to prevent pressure on the Jamaican dollar in the currency market.

"I think, on the whole, high-interest-rate risk and Jamaican-dollar-depreciation risk await the Jamaican economy if the Government has not put in place counterpolicies to deal with these risks," he said in an emailed response to The Gleaner.


Financial analyst Keith Collister has also expressed concern about the medium-term impact of the increase in interest rates by the Federal Reserve.

"In the medium term, however, depending on the pace of US-rate rises and Jamaica's economic stability, rising rates could pose challenges to our ability to raise capital, particularly if it leads to damage in global capital markets, on which Jamaica still depends. There are some signs of this in global high-yield bond and emerging markets already, and these pressures may rise next year," Collister said.

He, however, pointed out that the increase in US interest rates is unlikely to have a major impact on Jamaica in the short term, given that the equivalent policy rate of the BOJ, at 5.25 per cent, is still five per cent above the Federal Reserve rate.