Ashford W. Meikle, Staff Reporter

Shirley

The Bank of Jamaica (BoJ), which has trimmed interest rates no fewer than a dozen times in the last 30 months, says there will be more cuts before year-end.

But bankers yesterday reacted cautiously to the pronouncement by BoJ governor, Derick Latibeaudiere, warning that the central bank's capacity to act would be determined to a significant degree by what happens to inflation and whether the Fed continues to hold the throttle on U.S. rates.

"I think we are at the level where this is the lowest we can go," argued one analyst, who asked for his name to be withheld. "We are pretty much under the water in terms of yields."

Unless inflation this year remains in single digit for the entire 2006, it will be "impossible to expect rates to go any lower," this analyst argued.

Inflation in the 2005 calendar year was 12.9 per cent, while the point-to-point movement in the consumer price index to June of this year was 8.4 per cent.

REASON FOR OPTIMISM

But, with headline inflation at 2.8 per cent in the quarter to the end of June, Latibeaudiere apparently believes he has reason for optimism and can make good his promise on interest rates.

"We are at our lowest rate right now - 12.8 per cent - and we are going to go down further before the end of the year," he told journalists and market analysts at his quarterly briefing on Wednesday. "... [We have never] taken interest rates down to where they are now and sustain it over such a period of time."

Not for a decade have interest rates - last reduced in May when the central bank snipped between 15 and 20 basis points from its open market instruments - been this low. Thirty-day Repos now carry a rate of 12.45 per cent, while the 180-day notes are at 12.8 per cent. In February 2004 these rates were at 14.85 per cent and 16.25 per cent, respectively.

The closest have the central bank come to getting rates down to this level was the 12.95 per cent on 30-day Repos it managed in July 2002, from a high of 29 per cent in 1998. But that trend was reversed in March 2003 when, in the face of a run on the Jamaican dollar, the central bank jacked up rates on one year instruments to as high as a 39.95 per cent, while 30-day Repos moved to 15.95 per cent.

In the past the finance minister Omar Davies has been harshly criticised for high interest rates. Critics have argued that high rates have been driven by fiscal indiscipline on the part of the Government and that this contributed significant to Jamaica's anaemic economic performance over the past dozen years.

Now, Latibeaudiere apparently believes that his outfit has now better synchronised their strategies, despite pressure on the administration from some public sector unions for increased spending on salaries.

INTEREST RATES UNPRECEDENTED

Latibeaudiere quaintly hailed current interest rate lows as "unprecedented for a long time". He intends to do better.

However, Sandra Shirley, the president of First Global Financial Services, stressed that any further reduction in interest rate cannot be viewed in isolation from international events.

"It is not just the strength of our own economy, but it is relative to our own trading partners," she said. "Any reduction is a function of what is likely to happen with respect to the yields on U.S. dollar instruments. If the Fed reduces interest rates it will provide an opportunity for us to reduce our rates downward. We will just have to wait and see."

Latibueaudiere's promise, in fact, came a day after the U.S. Federal Reserve, held rates steady after 17 rate hikes over a two-year period.

Taken from the Financial Gleaner Friday, August 11, 2006.