By McPherse Thompson, Staff Reporter
Bank of Jamaica building in downtown Kingston.
VIGOROUS ACTION by the Bank of Jamaica has arrested the slide in the local currency.
The Jamaican dollar has appreciated in value since the Bank of Jamaica (BoJ) increased the interest rates on its 90-day and 120-day open market instruments two days ago, a move which market players believe will be beneficial in the short term.
The local currency gained three cents in trading against the United States dollar yesterday based on the weighted average selling rate published by the Bank of Jamaica. It also strengthened against the Canadian dollar and the British pound.
Last Friday, the last trading day before the BoJ adjusted its reverse repurchase rate, the Jamaican dollar was sold for a high of $49.17 for US$1.
This followed days of continuous weakening of the local currency, which cleared the $49 mark for the first time, despite the BoJ's intervention in the market. On Monday, the dollar fell marginally to $49.10 after trading at a high of $49.19 to US$1.
On Monday, the BoJ had increased the yields on its 90-day reverse repurchase instruments from 13.15 per cent to 17.25 per cent, and on the 120-day instrument from 13.25 per cent to 17.05 per cent, in response to what it said were unstable conditions in the foreign exchange market.
According to the Central Bank, "lower than expected inflows from tourism and the speculative activity of some players in the market have combined to trigger a depreciation in the exchange rate, which could jeopardise the Bank's inflation target."
Referring to the increased interest rates imposed by the Central Bank, Steven Bruce-Miller, trading manager at Jamaica Money Market Brokers (JMMB), said "we have not seen rates of this nature since January" and its imposition should result in "some appreciation in the exchange rate."
Mr. Miller said it was necessary for the BoJ to stem the depreciation in the exchange rate because its interventions in the market had not had enough impact. Before the BoJ's move, he said, some investors had apparently converted their local currency to US dollars and there was also hoarding.
"So raising interest rates in the market was a necessary move," he said.
The usual seasonal foreign exchange shortage at this time of the year notwithstanding, both Mr. Miller and Earle Harriott, president of the Cambio Dealers Association of Jamaica, said pre-election jitters were also driving investors to convert from Jamaican currency into US dollars.
With the increase in reverse repurchase rates, Mr. Harriott said, it would have the effect of forcing investors to "stay in Jamaican dollars" or have them reconvert their US dollars into local currency.
"It's a good, short-term measure," said the Cambio Dealers Association president. "We do not believe the intervention funds alone would have been enough to stabilise the dollar."
Another financial analyst, who preferred not to be identified by name, said he did not believe the increase in repo rates would stabilise the Jamaican dollar.
Furthermore, he said, the BoJ's stated plan was to bring down interest rates, but "as it is now, no one will have faith in them that they really intend to bring those rates down."
He noted that the repo rates would set the trend as to where interest rates go and that would not be good for the productive sector.
The BoJ also said the increased yields on its tenors was aimed at removing the current concentration of liquidity in short-term instruments. "The Bank sees the liquidity overhang as temporary and has therefore left other rates unchanged," it said.
According to the Central Bank, the net international reserves, which stood at more than US$1.7 billion, remained an adequate reservoir of foreign exchange and would allow the Bank to intervene in the market if further action was warranted.
