Muddled interest rate policy

The Bank of Jamaica’s website shows their inflation target for the 2019 to 2020 fiscal year ranging from four to 6 percent and they expect that such high levels of inflation should be achieved by 2020/21.
While the central bank announced these targets, the government just reopened their 2029 bonds that was originally had a fixed interest rate of 5.679 percent. Investors placed bids to buy $12.9 billion although only $4 billion were offered for sale. The average yield came out at 5.195 percent. Some investors placed bids as high as 9 percent but were unsuccessful.
To tie up money for 10 years when the central banks is targeting inflation above the yield of the bond on the surface is puzzling. That of course is one conclusion. The more probable one is that those who invested in these bonds are betting that the central bank will not see inflation anywhere close to the levels that are targeting. This publication is of the view that the latter is the correct position.
Something is clearly wrong with the monetary policy.

BOJ interest rate & cash reserves cut will help push demand in the economy.

Changes in interest rates should start having an impact on the economy within six months, experts say. At this stage based on the reduction in rates over the past year or more, economic growth should be picking up sharply. That is not happening and its crawling along around 2 percent pace according to the PIOJ, worse, a lot of the growth is coming from export of goods and services, not from pick up in local production of goods or services.
At the start of 2018, BOJ policy rate was at 3 percent today it at a mere 0.75 percent. That is a very sharp reduction within just over a year. The central bank has also in recent times cut the cash reserves levels thus creating more liquidity in the system.
With all of those moves, lending rates remain relatively high, with the only noticeable change, being rates on motor car loans. The worse signal of this is that credit card rates remain at nearly 50 percent per annum without a single point move. Mortgage rates remain unchanged or largely so, with one or two institutions offering new borrowers lower rates. The 225 percentage points cut in overnight rates (ON) should have induced an across the board reduction in lending rates under normal circumstances but that is not happening and is clearly showing that something is wrong with the policy.

National Commercial Bank pays very low savings rates

Some of the impediments to lower lending rates, are caught up in the very measure BOJ is pushing. Banks have a large pool of very low cost deposits and current account balances that pay zero interest rates. When rates are low, it is much more difficult to cut a rate that is just a fraction of a percent. Put another way, if banks are paying 0.5 percent or less savings accounts, how do they pass the BOJ rate cut onto savers, the ones that will bear the cost?
A visit to NCB website sets out the likely interest rates they pay on deposits. Up to $99,999, a saver would get a mere 0.05 percent, at $1m one would get 0.55 percent and 0.70 percent would be the payment for $5 million and over. These rates were at April 2018. This is the clearest sign why the BOJ policy has not worked and will not work. Since last year April, the overnight policy rate is down by 200 basis points. With rates on deposits at almost zero the banks have limited options to cut rates and if they did, it would not be anywhere close to the extent of the ON rate cut.
Reducing the cash reserves is a far better tool to cut lending rates. Banks with the large amount of profits reported and in many cases lousy service, are not the friends of a large cross section of Jamaicans. Like them or hate them they still provide a useful service. Companies generally, do not absorb cost, they pass them on to consumers. When governments place taxes on banks and other financial institutions with the mistaken view that they are taxing those entities, they are making a huge error. What taxes do is increase the cost of banks providing service to customers. That is one reason why some in the system want government to move and curtail bank charges. When banks were first slapped with the asset tax, they turned to fees for added revenues, to offset the increased tax.
Government, if they are serious about stimulating the economy by lower lending rates must bell the cat. First, they must accept that the cutting interest rates on deposits will not work as those rates are already close to zero. Keeping savings rate artificially low will also encourage more persons to revert to savings in US dollar and place pressure on the Jamaican dollar. At best, banks may cut a few points here or there off lending rates but it will make little difference.
Government must sit with the financial institutions and arrive at an agreement to cut taxes in exchange for reduced interest rate on loans and credit cards. That is the only way to effect serious loan rate reduction to stimulate the economy in the shortest possible time.
To continue with a low savings rate policy that is not sustainable is going to lead to a bubble in the segments of the economy and when the inevitable reversal starts, there will be pain, as asset values adjust to the increasing value of money.

Sharp slash to interest rates

Bank of Jamaica slashed their overnight policy interest rate by a hefty 50 basis points to 0.75 percent per annum, effective 20 May 2019.
This decision reflects Bank of Jamaica’s assessment that inflation will remain low for until the end of 2020 as well as provide added stimulant for faster economic growth.
The reality is that there is a huge disparity between the move by the central bank and government policy. While the central bank lowers the rate to stimulate the economy, the government has artificially helped in keeping bank lending rates much higher than needed by taxing customers of banks by high taxes on banks that is resulting in interest rates being around 3 percent points higher than they should. This is where the focus needs to be and not on lowering on savings rate.
Low inflation is here to stay, despite the central bank’s continued focus on an excessively high 4 to 6 percent range. The lowering of interest rates is hurting savers particularly pensioners who have to rely on savings.
According to Bank of Jamaica, the decision is intended to stimulate an even faster expansion in private sector credit which should lead to higher economic activity, consistent with the inflation target. The move also comes at the same time that the bank announced the lowering of the cash reserves that commercial banks need to keep with the central.
What are the implications, investors looking for yields on local bonds will be getting less on the dollar for savings. Stocks will become more attractive as dividends in a number of cases are paying more than Treasury bill rates that sits at 2 percent per annum. Real estate will benefit from more demand as an alternate form of investing.

US$20m pumped into Jamaica’s forex market

Jamaica’s Central Bank is offered US$20M for sale in FX market on monday.

Jamaica’s central bank, Bank of Jamaica pumped US$20 million into the country’s foreign exchange market today, in what they call a flash intervention.
The intervention, not previously announced, comes against the background of the exchange rate for the US dollar closing on Friday at $129.41, up from $128.19 on Thursday, with selling by dealers, amounting to US$25.3 million on Friday. It also takes place with a US$77 million build up in Net International Reserves at the end of March, to US$3.085 billion from US$3,007 at the end of February.
The flash offer resulted in 39 bids amounting to $45.65 billion that came in for the amount auctioned. Just 15 bids were accepted, with rates ranging from $130.25 to $131.80. The average clearing rate was $130.85.

Xmas cash suggests higher growth – BOJ

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Currency in circulating increased at a much faster pace that Bank of Jamaica projected in early December. According to the Central Bank “the faster currency growth possibly reflected improved GDP growth, employment and retroactive wage settlements during the period.”
During the last six days of December, Bank of Jamaica recorded net currency issue of $5.457 billion to financial institutions. This was substantially above the Bank’s projection for net issue of $412 million as well as the $860 million currency issue for the corresponding period of 2017 and average of $1,396 billion over the past 5 years. The currency issue for the week contributed to an overall growth of $23.6 billion or 21.4 per cent in the currency stock for December 2018, above the Bank’s projection for growth of $18 billion or 16.5 per cent. The increase for the month also exceeded that for December 2017 of 16.5 percent and was the largest growth in December since 2007.

Grace new HQ close to the end of construction in downtown Kingston

At the end December 2018, the currency stock amounted to $133.5 billion, representing an annual increase of 20.4 percent, compared to annual growth of 12.9 per cent at end December 2017. The Central Bank stated that “when the estimated change in consumer prices is taken into account, the real annual growth in currency at end-December 2018 was 15.9 per cent, compared to 7.3 per cent for the corresponding period in 2017”.
The Bank is anticipating, that most of the currency issued during December, will be redeemed in January. The release from the bank stated that, “for the last five years, net currency redemption in January averaged 75.8 per cent of the net currency issued in the preceding month.”

BOJ senses pick up in GDP growth

Image courtesy of arztsamui/FreeDigitalPhotos.net

Economic activity may has picked up pace in the latter half of the year compared with the first half, with a strengthening in real GDP growth and employment over the second half of the year, Bank of Jamaica is suggesting.
The central bank was commenting on the increase in money in circulation for December. “This projected acceleration in the growth in real currency demand for December 2018 is consistent with the higher growth rate that has been evident between August and November 2018,” the central bank stated. Economic growth in the June quarter was preliminarily placed at 2.2 per cent by the Statistical institute of Jamaica.
The bank went on to say, “when the forecasted change in the general level of consumer prices is taken into account, the projected real growth in currency for the 2018 is 10.5 percent, which is higher than the real growth of 7.3 percent for the previous year.”
The projected currency stock of $128 billion at end-December 2018 represents an annual growth of 15.5 percent, an acceleration when compared with the 12.9 percent recorded at December 2017.
Bank of Jamaica projects that the value of currency issued by the Bank will increase by approximately $18 billion (or 16.5 percent) in December 2018 to end the month. The central bank states that the projected growth for the month is broadly consistent with the 16.5 percent growth recorded for December 2017 as well as the five-year average growth rate of 17.3 percent for December.
BOJ net issued $4.2 billion in currency for December up to 14, this year (representing a 3.8 percent growth for the month to date). This compares to net currency issue of $1.4 billion over the same period in 2017.

Crude oil sinks below U$49

The price of crude oil on the world market sank to US$48.49 in early morning trading, the lowest levels since October 2017. The price peaked at US$76.10 in early October this year.
The trend suggests that the price will go even lower with increasing supplies said to be coming from production in the USA and concerns that the global economy is slowing and would use less oil.
The change in price has significance for the Caribbean region that are mostly net importers of oil, as well as Trinidad and Tobago who are producers of oil, and will earn far less income from the lower price. For Jamaica, it is likely to tame inflation as it did in November, when the country recorded zero inflation. It will also make the Bank of Jamaica’s inflation target of 4 to 6 percent targeting for the current fiscal year that the Country’s Central bank states was set by the Minister of Finance and the Public Service in September 2017, far more challenging than it was before.
If the price remains below the US$50 mark for a prolong period, then Jamaica could save somewhere in the region of US$$300 million per annum and that could positively affect the exchange rate, for the local currency.

Business confidence rising again

Corporate executives Perception of Present and Future Business Conditions increases in the latest survey done on behalf of Jamaica’ central bank for September this year.
The Present Business Conditions Index increased to 106.6, up from 100.8 recorded in the previous survey in July. The Future Business Conditions Index also increased to end at 128.2 relative to 122.7 in the previous survey in July. The increase in the Present Business Conditions Index reflected a rise in the number of respondents of the view that conditions are “better, ”the report from Bank of Jamaica stated. The out turn for the Future Business Conditions Index mainly reflected a decrease in the proportion of respondents who believe that conditions will be “worse.”
Future Business Conditions fell from a peak of 155.1 in October 2016, but fell since then and has bounced around quite a bit. The recent decline seems to have coincided with the slippage in the exchange rate of the Jamaican dollar.

More gains for Jamaican dollar

The Jamaican dollar gained almost one percent in value for the past week, with the selling rate ending the week at J$132.55 to one US dollar, an improvement over the J$133.80 it was sold for at the close of the previous week.
The local currency closed on Thursday with the selling rate at $133 and buying at $131.77, on Friday the buying rate closed at $131.33 or 44 cents less than on Thursday.
Unlike the previous week when dealers bought $48.8 million in US currency and the equivalent of US$56.6 million in all currencies and sold $46 million in US currency and US$53.2 million in all currencies, this past Friday only US$32 million was purchased in United States dollars and US$34.8 million in all currencies with US$43.74 million sold in US dollars with a total of US$44.67 million of all currencies.
On Wednesday coming, Bank of Jamaica will have it last scheduled sale for October when it auctions off US$10 million to the market that could lead to further revaluation of the local dollar.

Jamaican dollar makes strong gains

The Jamaican dollar recovered the losses suffered at the close of trading on Wednesday as the selling rate closed on Thursday at $133 to US$1 as dealers sold US$40.57 million, down from $133.55 on Wednesday as US$42.75 million was sold.
Dealers bought just US$30.3 million on Thursday at an average of $131.77, down from $132.26 in purchasing US$45 million. Total foreign exchange traded on Thursday amounted to US$38 million being bought by dealers and sales of US$47.9 million. the amount purchased by dealers on Wednesday was boosted by sale of US$10 sold by Bank of Jamaica through their B-FXITT weekly auction.

BOJ FX sale pushes rate down

BOJ sold US$11M in today’s BXFITT auction.


The average rate for the Jamaican dollar auctioned by Bank of Jamaica in today’s B-FXITT Standard Intervention Auction came out at $135.42 down from $136.55 at last week’s auction.
Bank of Jamaica offered US$11 million for sale in today’s B-FXITT auction with 42 bids received covering US$23 million. Last week 41 bids were received amounting to $26.15 million for US$11 million on offer.
The country’s central bank will be offering US$41 million in sales over the next four weeks, including $11 million next week and US$10 million for the other three weeks up to October 17.
Today’s average rate compares with an average buying rate of $134.612 for purchase of US$33.75 million in Tuesday’s foreign exchange trading and an average rate of $135.56 with US$37.67 million being sold. On Monday, Dealers bought US$42.19 million at an average of $134.87 and sold US$42.19 at $135.95.
On Wednesday, the foreign exchange market closed with dealers buying US$56.88 million in all currencies which included US$49.86 million in US dollar currency at an average rate of $134.73 and selling a total of US$519 million in all currencies with the US dollar accounting for US$38.27 million at an average of $135.65, up slightly on Tuesday selling rate.