Monday's dramatic hike in interest rates by the Bank of Jamaica (BOJ) contrasts sharply with what is happening across the world, where other central banks are moving rates in the opposite direction as part of efforts to deal with the global financial crisis.

Local private-sector leaders have already voiced concerns, but the BOJ has defended its action, arguing that it had no option but to take the measure to protect the value of the Jamaican dollar.

However, other central banks facing similar challenges have determined that they could get the productive sector going and halt the economic decline by lowering interest rates.

In fact, the European Central Bank and the Bank of England are both expected to lower rates to almost record levels today.

The Federal Reserve in the United States (US) is also expected to lower interest rates at its next policy meeting December 15-16.

Further away, the Bank of Thailand reduced its key lending rate by one percentage point to 2.75 per cent yesterday, while the Reserve Bank of Australia cut interest rates by 100 basis points on Tuesday to its lowest level in years.

Similar interest-rate cuts are expected when the Swiss National Bank announces its measures on December 11 and the Bank of Canada has already signalled that lower rates will be announced on December 9.

Need to protect economy

In all the cases, the central banks have argued that lower interest rates are needed to protect their economies at a time when the world's financial market is in turmoil.

On December 2, US Federal Reserve Chairman Ben Bernanke signalled that officials would hold nothing back in their support of financial markets and the economy, calling further interest-rate cuts from already low levels "certainly feasible".

The Federal Reserve has already made it clear that to prevent a deeper and prolonged recession, it was prepared to further lower interest rates.

However, the BOJ says this was necessary to preserve the value of the Jamaican dollar at a time when other efforts to stop the slide and mop up liquidity have failed.

Necessary action

"This high level of Jamaican-dollar liquidity, in the context of these attractive foreign-currency alterna-tives, makes it necessary for BOJ to take this action.

"This increase in interest rates is designed to dampen the extraordinary demand related to portfolio decisions and thereby restore predictability and order to local financial markets," the BOJ argued as it announced rates as high as 24 per cent.

"This has triggered a disorderly depreciation in the exchange rate which, if allowed to persist, will only precipitate higher inflation and greater macroeconomic instability," the central bank added.

That has not satisfied the Private Sector Organisation of Jamaica (PSOJ), which on Tuesday expressed concern at the move.

Private sector concerned

"This must only be a very short-term measure and should be reversed quickly once the authorities' concerns over the demand for foreign exchange that this Jamaican-dollar liquidity might create have subsided," Chris Zacca, president of the PSOJ, said after a meeting with Finance Minister Audley Shaw and BOJ Governor Derick Latibeaudiere.

A similar concern was expressed by the Jamaica Manufacturers' Association (JMA), which has argued that the interest-rate increase will have a negative impact on the productive sector.

"Manufacturers cannot be competitive in any market - local or export - or afford to retool, if development financing is inaccessible because of high interest rates," the JMA said.

arthur.hall@gleanerjm.com