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.

Falling interest rate was huge buy signal

Apartment complex in Kingston – Real estate values to benefit from low interest rates.

Declining interest rate is a huge buy signal for both stocks and real estate investments, if the fall is expected to last. Interest rates have fallen to the lowest levels on record, in Jamaica and while the low rate of 1.7 percent in treasury bills won’t last forever, it is expected that it will not go up too far from current levels any time soon.
In May this year, Bank of Jamaica cut the overnight policy rate, by 25 basis points to 2.5 percent that along with a further decline in short term Treasury bill rates on Wednesday.
IC Insider.com stated then, that the moves provided more ammunition for a big surge for Jamaican stocks. The piece went on to state that with a 15 percent fall in BOJ’s policy rate in 2018 so far, stocks are lagging behind, with an increase of just 6.6 percent for the Junior Market and 4 percent for the main market.
The fall in Treasury bill rates was far greater than the rise of the All Jamaica Composite Index, an indication of a lot more upside for stocks based on the downward movement of interest rates.
Investors seem to be focusing more on profits in valuing stocks than on interest rates so far. That will change. 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, providing more ammunition for more gains in stock prices.
We stated that with the fall in interest rates, the PE of money is at the high end 40 times income and using corporate bond 12 times, but the PE ratio should be more tied to Treasury Bill rates and that PE is now in 30 range but stocks are mostly in the low teens and below. IC Insider.com further stated that most investors did not appear to be paying much attention to the tsunami that was on the way that will see prices move sharply higher.
Some were skeptical about the assertion that the fall in interest rates could drive stock prices. The record is clear as there are two main developments that drive stock prices – interest rates and profits. With just over five months passing, investors have not only warm to the fall in rates but many are not willing to part with their stocks. Late comers to the party will pay much higher prices than in May and June. Up to Friday the Junior Market is up 24 percent and the Main market is up 31.7 percent and rising. Technical reading of the market suggest that the Main market has another 25 percent run to make before probably cooling for a charge to 720,000 points on the All Jamaica Composite Index in 2019.
The fall in interest rates makes it cheaper to buy real estate with lower interest rates for each dollar borrowed. Additionally, investors will switch funds from fixed interest investments into stocks and real estate thus driving up their values.