THE BANK of Jamaica, the central bank, yesterday hiked interest rates by four per cent for the second time in eight weeks, in a bid to defend the Jamaican dollar.
In a move that took many by surprise, the BoJ said it was increasing short-term rates on its 270-day and 365-day Reverse Repurchase instruments.
The 270-day rate has jumped from 17.60 to 20 per cent, while the 365-day rate rose from 18 per cent to 22 per cent.
The move upset several traders as it came two days after a $350-million one-year Treasury Bill auction closed on Wednesday with an average yield of just 17.28 per cent.
At the same time it moved the short-term rate, the BoJ intervened in the foreign exchange market selling at US$1 to J$45.20 in a bid to drive down the exchange rate which was heading towards closing the day at $46. The move appeared to work, at least temporarily, because the Jamaican dollar slipped back from a $45.80 to US $1 finish at closer to $45.50 to US $1, according to traders.
The currency started the week trading around $44.78 to US $1.
In a statement yesterday, the central bank said: "All other Reverse Repurchase Rates remain the same. This adjustment in rates is a direct response to the sharp movement in the foreign exchange rate over the past week. The Bank of Jamaica cannot tolerate this rapid rate of movement as it jeopardises the attainment of key economic objectives".
It added: "In particular, and despite the inflation out-turn in October being only 0.13 per cent, such a rapid rate of depreciation in the exchange rate has negative implications for the rate of increase of prices."
In early October it pushed up interest rates four per cent on the one-year debt instruments to 22 per cent. Rates had since come down.
The Jamaican dollar started the year at US$1 to $41.75 and has depreciated around 10 per cent in 11 months.
The previous interest rate hike was put down to attempts to calm the foreign exchange market, where the currency had slipped since the Government issued a tax-free US$225- million bond, yielding 13.125 per cent, on the international markets at the end of August.
But yesterday's move came as local institutions moved into US dollars to satisfy seasonal demand putting pressure on the local currency.
