By McPherse Thompson, Assistant Financial News Editor
Latibeaudiere... "BoJ's latest intervention in the foreign exchange market has been producing the expected results." - File
THE BANK of Jamaica (BoJ) will be continuing its stance of a tight monetary policy and only gradually adjust interest rates when stability in the domestic financial markets has been restored, according to Governor, Derick Latibeaudiere.
The move is being made against the background of protracted demand pressures in the foreign exchange market since last December and the unsettled reaction to the Government's fiscal measures announced in April, Mr. Latibeaudiere said.
Those factors have defined the stance of the central bank for the near-term, said the Governor, who was addressing a press briefing on the economic outlook for the June quarter and fiscal year 2003/2004 at the BoJ's auditorium in downtown Kingston yesterday.
"We recognise that high interest rates are being replicated in the bond markets and have been affecting Government's cost of borrowing, but doing nothing would have had even more severe consequences," he said.
The BoJ's latest intervention in the foreign exchange market has been producing the expected results, with the weighted average selling rate appreciating by 12.4 per cent since May 19, Mr. Latibeaudiere added.
The Jamaican dollar depreciated by about 31 per cent against its United States counterpart since the start of the year to reach an average selling rate of just over $67 before it started appreciating when the BoJ launched an aggressive intervention drive just over a week ago.
"If we had allowed a continuation of the free-fall in the exchange rate," he said, "the consequential spiral in prices in an import-dependent economy would have had such an adverse effect on all economic agents that the country could fall into social as well as economic chaos."
Mr. Latibeaudiere, responding to questions, said the central bank has sold about US$100 million during the course of this month to intervene in the foreign exchange market, but that has not greatly impacted the Net International Reserves (NIR) because "we have sold foreign exchange and we have bought."
The NIR now stands at about US$1.25 billion and is expected to remain relatively flat during the course of this year despite expected continued interventions in the market, the Governor said. He said that while the Government could seek to borrow from the NIR to meet a US$350 million obligation this year, "we expect the Govern-ment will be able to borrow the money it needs."
The BoJ Governor said reports from the tourism sector continued
to be positive and therefore they expected to see a normalisation of supplies of foreign exchange in that market.
The recent measures taken by the central bank were aimed at preserving and maintaining the monetary and price stability that we have painstakingly achieved in recent years," Mr. Latibeaudiere said. "However, monetary measures are insufficient by themselves. There is also a continued imperative for credible fiscal measures to support monetary initiatives."
Asked to elaborate, the Governor said the Government has outlined certain measures, but "we need to give them a chance to work. You can't judge a set of measures just after their presentation," he said, adding that "we at the central bank will be monitoring those measures closely, but I'm saying give it a chance to work."
The central bank has forecast inflation to be in the range of about 3.6 per cent for the June quarter, higher than normal primarily because of recent tax adjustments on various commodities and services.
Mr. Latibeaudiere said the lagged impact of the exchange rate depreciation in the March quarter would also pass through to prices during the current quarter. Domestic fuel prices, transportation and utilities are also expected to reflect the impact of oil prices before the United States-led war on Iraq in March.
Leading indicators of economic performance suggest there was expansion in real Gross Domestic Product (GDP) in the March 2003 quarter, significantly stronger than the 0.7 per cent recorded in the corresponding period last year.
Mr. Latibeaudiere said that is expected to continue in the June quarter with the main areas of growth expected to come from the agriculture, mining, construction and basic services sectors. While growth is also expected from transportation and miscellaneous services, this may be dampened by the effect on travel by the recent war, increasing concerns about security and the emergence of the SARS virus, he said.
