Dennise Williams, Staff Reporter
Derick Latibeaudiere, Bank of Jamaica Governor. - IAN ALLEN/STAFF PHOTOGRAPHER
BETWEEN THE months of June, July and August, the central bank has intervened 13 times in the foreign exchange market to shore up the local currency, which was under pressure from broker demands.
The Bank of Jamaica (BoJ) has now put pressure on the brokers to help control the situation.
Governor of the BoJ , Derick Latibeaudiere walked softly into a meeting last week Thursday with bankers and securities dealers but carried a big stick - the power to raise interest rates.
Sources tell Financial Gleaner that the Governor laid down the law to the players in the financial sector - ease up off the pressure on the local currency or interest rates will head up.
It is not an idle threat. In early February of 2003, the BoJ moved to reverse the continued slide in the value of the local currency against the U.S. dollar by introducing a 150-day reverse repurchase instrument at interest rate of 30 per cent.
This year, armed with an impressive war chest, the BoJ first attempted to use market intervention to prop up the dollar.
Based on information collected from the BoJ's website, the Net International Reserves (NIR), the tool used by the BoJ to defend the Jamaican dollar, decreased by US$7.55 million dollars between June 2005 and July 2005.
As at July the NIR still amounted to a healthy US$2.149 billion down from US$2.157 billion in June.
However, the continued demand by brokers was a logical result of the low returns experienced on local currency money market instruments, which average 12 per cent, but whose real return are eroded in an environment where the year-to-date inflation rate is 18 per cent.
Yet, despite the negative real returns facing investment managers, the industry apparently took the Governor at his word because from last week Friday to yesterday's trading, the Jamaican dollar has steadily appreciated.
Because, to the industry, the threat of higher interest rates has major negative implications.
SENSITIVE TO INTEREST RATES
Christopher Chin Loy, investment manager at Mayberry Investments said, "The central bank knows how sensitive the industry is to interest rates. It would hurt the equity markets and hurt the private sector's enjoyment of lower cost funds."
And he speaks from experience. In February 2003, during an interview, Kiesa Ansine, equities analyst at Mayberry Investments, said that on February 7 the Jamaica Stock Exchange (JSE) index which had peaked at 46,245.38 points, fell to 44,907.37 points on the day of the interview, 2.89 per cent down from its peak since the start of the year.
She said the volume traded on February 10 was above average, triggering speculation that investors were selling stocks to take advantage of the 30 per cent money market instrument.
But in 2005, the added dimension would be that an increase in interest rates would derail the aggressive push by commercial banks to expand their loan portfolio. One banker speaking recently even hinted at an increase in loan delinquencies if interest rates were to increase.
Orville Johnson, chairman of Today's Money said, "It was a matter of hard choices. Mr. Latibeaudiere had to act because we all know that inflation is the real problem. We have no control over international oil prices, but when coupled with movement in the foreign exchange it is too much of a jolt."
That said, the pain would not be one sided. In a sense, the increase in interest rates would present a pyrrhic victory for the Central Bank. According to one attendee at Thursday's meeting, who asked for anonymity, "Mr. Latibeaudiere said that for every one per cent increase in interest rates, the Government incurs interest expenses of $5 billion."
