By McPherse Thompson, Assistant Financial News EditorA NEW measure taken by the Bank of Jamaica (BoJ) yesterday, ostensibly to save the Jamaican dollar from further weakening, saw the local currency strengthening and closed the day 51 cents higher.
The BoJ increased interest rates across its spectrum of reverse repurchase instruments on account of increased speculation and heightened instability in the foreign exchange market, in a move to absorb Jamaican dollar liquidity, according to a release yesterday.
By mid-morning the dollar was trading in the region of $54.70, a gain of $1.24 on the BoJ's all time high weighted average selling rate of $55.94 it reached the day before.
Simultaneous with the hike in interest rates, the BoJ offered $300 million worth of six-month treasury bills at an average yield of 33.47 per cent, which was oversubscribed by 286 per cent.
Financial analysts said the treasury bill offer would also serve to absorb Jamaican dollar liquidity, but said the increased speculation and heightened instability in the market could be attributed to news about the poor state of the Jamaican economy during the past months and the quietness of the Government about what was being done to correct the situation ahead of the budget presentation. Furthermore, the market required the Government to specifically say how it intended to close the budget deficit and improve the economy, said an analyst at Jamaica Money Market Brokers.
Earle Harriott, an executive member of the Cambio Dealers Association of Jamaica, said that after news of the interest rates hike reached the market, there was a positive reaction in terms of the BoJ's objective to strengthen the dollar. Contract traders with US$1 million and above sold at $54.70 and those trading at $56 to the US dollar on Monday were either minimal or non-existent, he said.
With the Jamaican dollar devaluing at a rate of about 40 cents a day during the past week and more than $2 during the past three weeks, the 51 cents appreciation yesterday meant a net gain of about 94 cents over Tuesday's rate of $55.94 as the average selling rate improved to $55.43 yesterday.
According to Mr. Harriott, the hike in interest rates will have a substantial impact because investors will now opt to convert their US-dollar portfolio into Jamaican dollars. "It has had an immediate impact on the foreign exchange market, but how sustainable it will be is anybody's guess," he said. Moreover, he believes investors will choose the more attractive 180-day reverse repurchase instrument over the shorter term maturities. The rate on the 180-day instrument shot up 13.5 per cent to 33.15 per cent, while those on the 30, 60, 90 and 120-day maturities have been increased by between 1.75 per cent and 5.6 per cent. Interest rates on the 270 and 365-day maturities went up 13 and 11.95 per cent respectively.
However, yesterday's increase in interest rates stunned the equities market, pushing the Jamaica Stock Exchange (JSE) index down 613.04 points or 1.28 per cent to close at 47,263.53 points, and resulted in declines in 18 of the 25 stocks traded. The JSE All Jamaica Composite Index also declined substantially, losing 1,291.87 points or 2.77 per cent to close at 45,211.14 points, and the Jamaica Select Index declined by 3.42 per cent or 48.96 points to close at 1,382.21 points.
Market players said the new BoJ measure has served to erode certain gains made in the equities market especially during the past two weeks. Others said the movement is the stock market was probably not linked to the interest rate movements and will require a few more days to see if the pattern holds.
The BoJ said the interest rate movements which came a week after an increase in the shorter terms instruments with the same objective of improving the value of the Jamaican dollar "is intended to absorb Jamaican dollar liquidity that has facilitated the sharp depreciation in the exchange rate, and is supported by the decision of the Ministry of Finance to offer a US-dollar indexed bond at the beginning of April."
It said the Bank would continue to assess conditions in the foreign exchange market and take appropriate action to ensure its stability.
It was the fourth time since January that the BoJ has put in place corrective measures to shore up the value of the local currency. In January, it introduced a special five per cent deposit for commercial banks and other institutions licensed under the Financial Institutions Act. A month later, with the local currency still losing value, the central bank introduced a 150-day reverse repurchase instrument at interest rate of 30 per cent, but lifted it after only four days in the market.
