Investors garnered interest rates as high as 11 percent on long term bonds issued by the Government of Jamaica last week auctions of three long term bonds that were reopened and raised $10 billion. The average rates were more moderate, with the highest average being 8 percent.
The Government also offered $5 billion of the 10 percent bond due 2037 with a duration of 15.5 years. The auction attracted $6.759 billion that resulted in an average yield of 7.9614 percent. The lowest rate was 6.7 percent for $50 million and the highest success rate was 10 percent. The highest submitted bid was 12.999 percent. A total of 56 bids went after the bond, with 46 being successful.
The 5.675 percent bond due 2029, with a duration of 7.5 years, ended with an average yield of 6.3506 percent. The auction attracted $2.727 billion, of which $1 billion was allocated. The lowest rate was 5.575 percent for $100 million and the highest success rate was 6.94 percent. The highest submitted bid was 11 percent. This instrument received 43 submissions, with only 18 being successful.
The 4.5 percent bond due 2025, with a duration of 3.5 years, delivered an average yield of 6.2329 percent. Bids from 51 applicants amounting to $4.779 billion chased the $4 billion on offer. Only 44 bids succeeded in getting allocated. The lowest rate was 4.5 percent for $44 million, with the highest success rate of 10.525 percent. The highest submitted bid was 11 percent covering $100 million.
The increased rates come against the background of recent moves by Jamaica’s central bank to hike rates and move towards an era of positive interest rates. Since making their intention known, the bank raised its overnight rate from 0.50 percent to 2 percent in September and November, while rates on 30 days CDs moved to 4.11 percent from 0.59 percent since the beginning of August and 2.15 percent at the September 22 Auction.
BOJ one year CDs 2.74%
Bank of Jamaica’s one-year CD offering of $4.5 billion on Thursday, October 21, ended with an average interest rate of 2.74 percent, much lower than the 4.53 percent the 30 days CD cleared at this past week.
The one year instrument attracted 107applications amounting to $15.88 billion, of which only 27 were successful. The highest bidding rate was 8.99 percent for $423 million, but the highest successful rate was 4.76 percent, resulting in 29.4 percent of the amount applied for being accepted by the Bank of Jamaica. The highest rate payable on the full amount of $140 million applied for was 4.5 percent, while the lowest rate applied for was 1.495 percent on $400 million.
The issue is likely to be regarded by the country’s central bank as highly successful. The success of the issue should result in more longer term offerings to lock up liquidity in the market on a longer term basis than the 30 days instruments that are more costly for the bank and more challenging to manage as they mature on a more frequent basis.
Jamaica is now seeing rising interest rates following the Central Bank’s decision in August to raise as a result of surging inflation. Following that decision, 30 day CD rates climbed sharply and the Bank raised its Overnight rate from 0.50 percent to 1.5 percent in September.
More interest rate increase
Bank of Jamaica focus is not on the naysayers about its recent move on interest rates that saw the central bank hike overnight policy rate by 100 basis points to 1.5 percent as the average rate on their latest Certificate of Deposit that was offered on Wednesday, October 6, cleared at 3.28 percent up from 2.59 percent at the previous auction a week before.
At the latest auction last week, the central bank received 82 bids amounting to $18.5 billion for $12.5 billion on offer. A total of 51 bids were successful up to 4.25 percent and comes after BOJ increased the overnight rate.
The total nominal outstanding amount for the 30-day CDs on the settlement date of October 8 will be $46.5 billion, up from $45.5 million the week before. Since the start of August, the central bank CDS have pulled in an additional $11.5 billion by increasing the amount in the market from $35 billion.
Bank of Jamaica hikes ON rate to1.5%
Bank of Jamaica, the central Bank of Jamaica day raise their Over Night interbank rate by one percentage to 1.5 percent. The rise follows the Bank’s announcement at the end of August that the announced the decision to consider commencing a tightening of monetary policy at the next meeting of the Bank’s Monetary Policy Committee in September and to immediately implement other measures aimed at moderating inflation expectations, including the containment of Jamaican dollar liquidity expansion.
A precursor to the policy rate increase and further tightening of the financial market, the CDs offered by the BOJ on September 29 resulted in a continuation in the rise of CD rates to 2.59 percent from 0.59 percent at the end of July.
The overnight rate was last cut to 0.50 percent in August 2019. It remained at that level up to the end of September. It ultimately dragged other rates in the system down and resulted in significant savings in interest costs for the government.
Consistent with meeting its inflation target sustainably in the medium term, the MPC agreed to continue increasing the Bank’s policy rate and by extension raising real interest rates, which are currently significantly negative and maintaining or intensifying the accompanying measures. This position is subject to inflation and other macroeconomic data evolving as projected.
BOJ paying 4 times July rates
It now costs the Bank of Jamaica nearly four times as much to manage the financial market as it did in July this year. After a long period of easy money, the country’s central bank recently announced that they were about to end the easy money policy in light of increasing inflation.
The most recent offer of CDs on Wednesday, September 22, fetched an average interest rate of 2.15 percent, with the highest rate of a successful bid being 2.99 percent and the lowest 1.75 percent. These rates are up from the previous auction, earlier in the month.
The outstanding number of CDs sits at $44 billion, up from $40 billion at the end of the month and $35 billion at the beginning of August. This week’s issue attracted 43 bids amounting to $14.77 billion for the total of $11.5 billion offer for the 30 days instrument. Only 29 submissions were successful.
On September 1st, an offer of $9 billion attracted 40 bids amounting to $14 billion. Only 18 were successful, resulting in an average rate of $1.51 percent, with the lowest bid coming in at 0.50 percent and the highest at 4.25 percent. The highest successful bid got 2 percent.
At the beginning of August, when the total amount of CDs was $35 billion, BOJ offered just $8 billion into the market and resulted in bids of $20.22 billion and resulted in an average interest rate of 0.59 percent, with the highest successful bid ending with a yield of just 0.62 percent, just higher than the banks overnight rate of 0.50 percent.
If the higher rates hold well into next year and beyond, there will be winners and losers. Banks with short term interest bearing instruments will enjoy a rise in revenues and on loans. Those with long data instruments will see capital losses unless their investment portfolio is balanced. Savers should see some increase in their interest income while borrowers will face increased interest costs. The move is likely to result in more appreciation of the Jamaican Dollar up to a certain level.
T-Bill plunged to lowest rates on record
In the latest Government of Jamaica Treasury bill (T-bill) auction, for April, rates hit their lowest level on record. The fall reversed the sharp uptick in rates at the March auction, with the average rate for the half-year instrument then hitting 2.01 percent and the three months 1.87 percent.
At the April auction, T-bill rates dropped to 1.08 percent for the 91 days Treasury bills, while the 182 days instrument ended with an average of just 1.05 percent. The rate for the 273 days instrument, averaged 1.73 percent.
In March, the demand dropped sharply to just $1.05 billion, for the half T-bills, the amounts applied for falling from $2.32 billion to $1.41 billion, in April, $2.46 billion chased after the $700 million on offer for the 90 days instrument, $2 billion went after the 181 days note and $1.5 billion chased down the 270 days bills. In each case, the GOJ offered $700 million to the public.
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.
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.
BOJ holds policy rate
Bank of Jamaica maintains the policy interest rate at 2.75 percent, the central bank stated on Tuesday. The rate is paid by the central for the placement funds overnight placements with Bank of Jamaica and helps in guiding the setting of rates in the wider economy.
“This policy stance reflects the Bank’s assessment that headline inflation for the next eight quarters should remain within the target of 4 percent to 6 percent, with the risks assessed to be balanced. Over the next three quarters, inflation is expected to track close to the lower bound of the target, primarily reflecting a decline in food prices as a result of a recovery in agricultural supplies. Thereafter, headline inflation is expected to converge towards the centre of the target,” the central bank stated.
Jamaica’s Central Bank in downtown Kingston.
“The outlook for inflation continues to be underpinned by the expectation that the Government will maintain a strong fiscal performance in alignment with the fiscal rules. There remains a risk that GDP growth will be slower than anticipated given the influence of external events.”
Bank of Jamaica stated that the “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. These conditions are considered to be appropriate at this time given the weaker-than-desirable pace of credit expansion. The policy stance has supported downward adjustments to yields on medium and long-term GOJ bonds in recent times and these downward adjustments are expected to flow through to loan rates.
Jamaica’s macroeconomic indicators remain positive. Inflation expectations remain low and anchored around Bank of Jamaica’s target, international reserves are increasing, the current account of the balance of payments is low and projected to remain at sustainable levels, market interest rates are falling and fiscal performance continues to be strong.”
