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Interest-rate cut signals Bank of Jamaica optimism

Published:Sunday | June 6, 2010 | 12:00 AM
The Bank of Jamaica, on the waterfront in downtown Kingston. - File

The central bank continues to signal lower interest-rates to the financial markets, cutting the rate payable on its 30-day instrument this past week to 9.5 per cent, from the previous 10 per cent, set in February. The 50 basis-points reduction, the same as the level of signal rate cut by the bank for the March quarter, the bank said, comes in light of positive changes in inflationary impulses, which, it projected, were likely to lead to the fiscal year inflation out-turn being at the lower end of the projected range of 7.5 per cent to 9.5 per cent.

The cut became effective Friday June 4.

"Secondary trading of securities, as well as successive auctions of Treasury bills all indicate an endorsement by the market of the new interest-rate norms (where) Treasury bill yields have fallen below 10 per cent," the Bank of Jamaica (BOJ) said in a statement.

It said too, that what it termed "the entrenchment of the lower interest-rate structure" had been supported by the appreciation of the exchange rate and "the reduction of sovereign credit risk, as reflected in falling yields on internationally traded GOJ bonds".

Bond yields affected

Bond yields have been affected by the Jamaica Debt Exchange, under which the Government took the decision to restructure its domestic debt by replacing some 350 high-priced government domestic bonds with 24 new issues, priced at a lower average rate of 12.25 per cent.

The recall was a precondition to the US$1.25-billion standby facility that was approved by the International Monetary Fund for Jamaica and was expected to result in savings of US$40 billion, the Government's debt-servicing costs.

In the meantime, the BOJ has noted that its outlook for growth in fiscal year 2010-2011 remains largely unchanged, despite the interruption to economic activity in the Kingston Metropolitan Area and fallout in tourism-related earnings anticipated in the short run.

The prospective reopening of a major alumina processing plant in June is expected to contribute to modest recovery in GDP growth in the current fiscal year.

The central bank also said in its statement that the ongoing reforms embedded in the Government's economic programme would lead to a lasting improvement in public finances and debt management and would create a basis for longer-term financial stability.