Bank of Jamaica cut their overnight policy rate by 25 basis points to 2.5 percent as Treasury bills rates fell at the latest auction for $2.1 billion offered by Government of Jamaica on Wednesday.
The central bank cited a raft of reasons for the move, but two factors not mentioned is the negative 0.4 percent fall in inflation in April leading to negative inflation of 0.6 percent year to date and the further fall in Treasury bill rates at Wednesday’s auction.
At the latest Treasury bill auction the rate on the 91 days bill declined to 2.71 percent from 2.818 percent in April, while the 182 days instrument average rate ended at 2.83 percent and is down from 2.979 percent in April. The 272 days Treasury bill cleared at an average of 3.08 percent with the highest allotted yield being 3.4 percent. In the three offerings of $700 million each attracted a total of just over $7 billion, an indication of the high liquidity in the market.
The central bank stated that “the risks to the inflation forecast are assessed to be skewed to the downside. The major downside risks to inflation include weaker than anticipated domestic demand conditions and slower than anticipated global economic growth stemming from geo-political tensions and protectionist policies. One upside risk to inflation is higher than anticipated commodity prices, particularly the price of crude oil. The risk of adverse weather may also cause domestic agricultural prices to rise faster than anticipated”.
“Bank of Jamaica’s decision to maintain an accommodative policy stance is aimed at supporting further credit expansion and faster GDP growth. When adjusted for expected inflation, the policy rate remains negative in real terms in a context of high liquidity in financial markets.
Interest rates are falling and will drive stocks higher in 2018.
These conditions are considered to be appropriate at this time given the weaker-than-desirable pace of credit expansion.”
“This decision is made against the background of positive macroeconomic indicators. Net international reserves are increasing and the current account of the balance of payments, while projected to widen, will remain at sustainable levels. Market interest rates are at record lows and falling and fiscal performance continues to be strong.”
The fall in the overnight rate translates to a 9 percent rise in stock market prices, but rates seem likely to decline some more before settling off before the year ends and stocks should enjoy more gains as a results.
