Latibeaudiere

The Bank of Jamaica has hiked interest rates again, twice in a four week period, a move that has telegraphed real concern about price stability in the broader economy.

Its most telling signal was the reintroduction in January of its 365-day debt instrument which it pulled from the market on December 22, 2006, saying then that the economy was so robust that its larger open market instruments had become superfluous.

"Monday's interest rate hike is a sombre sign indeed and hints that Jamaica's cyclical economic performance - with three years of good and three years of bad - may be heading into negative territory once more," said Clinton Brooks, managing director of investments, Stocks and Securities Limited.

Concerns

On Monday, when the central bank hiked rates to a new band of 13.5 per cent on the 30-day tenor to 15 per cent on the one-year instrument - reflecting increases of 85 to 150 basis point - it said the move was triggered by worsening inflation.

"The revisions reflect concern about the rising trend in inflation and its impact on the attractiveness of Jamaican dollar investments," said the central bank in a reference to the worsening fortunes of the Jamaican dollar (JMD) which slid to a new low of $71.80 against the USD Monday. The local currency traded flat a day later.

As the dollar slides, more investors have been hedging with foreign currency-denominated investments, apparently in significantly high numbers that have caught the attention of the central bank.

"While many of the factors that triggered the spike in inflation during the December quarter are already abating, inflation expectations have risen and are reflected in investors' portfolio choices," the BOJ said.

Hedging investments

Added Brooks, "When inflation rates are much higher than interest rates, investors are pushed to sell the Jamaican dollar in favour of stronger currencies."

Fiscal inflation was projected at 7.0 per cent, but is already double that at 14 per cent recorded at the end of December - or an annualised 19 per cent. Calendar inflation to December was 16.8 per cent.

"This indicates that investors would have seen an erosion in real terms of their returns on Jamaican dollar investments, and, as such, many investors have been hedging their investments in US dollars," said Vernon James, vice-president, corporate client services at NCB Capital Markets

BOJ open-market rates

February 4, 2008:

Tenor	New Rate (%)	Old Rate (%)	Change
30-day	13.5	12.65	85 bps
60-day	13.7	12.7	100 bps
90-day	13.9	12.7	120 bps
120-day	14.0	12.85	115 bps
180-day	14.2	13.0	120 bps
365-day	15.0	13.5	150 bps