The Jamaica Bankers Association

THE BANK of Jamaica (BoJ) has increased interest rates on its longer term open market instruments by up to 9.5 per cent in its latest effort to halt the depreciation of the Jamaican dollar against its United States counterpart.

The move, which took effect yesterday, saw the rates on the 180-day instrument being increased by 620 basis points, from 13.45 per cent to 19.65 per cent; those on the 270-day instrument up by 765 basis points to 21.5 per cent from 13.85 per cent, while the 365-day instrument went up by 950 basis points from 14.5 per cent to 24 per cent. Interest rates on the 30-day to 120-day maturities remain unchanged.

In a release yesterday, the BoJ said adjustments in interest rates were being made against the background of worsening international conditions, substantial Jamaica dollar liquidity and the re-emergence of foreign exchange market instability. "This action by the Central Bank is in keeping with its imperative to maintain relative stability in the foreign exchange market," the release said.

The Jamaican dollar has depreciated by more than $1.00 during the past two weeks, in some cases selling for as high as $55 to the US dollar in the last few days. Some dealers sold the US dollar for up to $54.90 yesterday, but at the end of trading, the BoJ's weighted average selling rate was $54.80, while the buying rate was $54.60.

Contacted yesterday, Raymond Campbell, president of the Jamaica Bankers Association, said it was too early to say how individual players within the market would react to the change in interest rates. However, he said the BoJ's move was the right one from the point of removing a distortion that existed in the yield of the longer term rates relative to the short term instruments.

Before the BoJ's action yesterday, the rates on the longer term instruments were lower that the short-term rates, "which meant that we had a distorted yield curve with the rates on the 180, 270 and 365-day being below the rates of the 30, 60 and 90," he said.

"So, I think the increase today really adjusted the yield curve to more appropriately reflect what will be the expectation within the market that the longer the term the higher the rate," Mr. Campbell said. The distortion meant that there would have been an encouragement within the market to stay at the short end, he said.

It was the third time since January that the BoJ has put in place corrective measures to shore up the value of the local currency. In January, it introduced a special five per cent deposit for commercial banks and other institutions licensed under the Financial Institutions Act. A month later, with the local currency still losing value, the central bank introduced a 150-day reverse repurchase instrument at interest rate of 30 per cent, but lifted it after only four days in the market.