BOJ cuts overnight, signal rates
Published:Friday | August 27, 2010 | 12:00 AM
The central bank has reduced the interest rate on its sole open-market instrument by 50 basis points.
Effective August 26, the coupon rate on the 30-day certificate of deposit is 8.0 per cent, down from 8.5 per cent which was set by the Bank of Jamaica just three weeks ago on August 4.
The Bank of Jamaica (BOJ) has also set a new overnight rate payable to financial institutions of 0.25 per cent, down from 0.5 per cent.
The new rate on the CD is near indistinguishable from the current Treasury bill rate which performed at 8.06 per cent yield on the three-month instrument in the latest monthly auction held Wednesday.
The six-month T-bill yielded 8.24 per cent.
The current outcome suggests that interest rates are yet to bottom out, even though inflation, which is still at double digits and running at an annual 12.6 per cent, means investors are reaping negative returns. Inflation, how-ever, is trending lower, with BOJ maintaining the fiscal-year out-come would likely land closer to 7.5 per cent than the top end estimate of 9.5 per cent.
BOJ trumpeted its stock of net foreign reserves of US$1.9 billion as well as July's monthly inflation outcome of 0.4 per cent as the basis for the latest adjustment.
"These resources constitute a strong buffer against financial or weather-related shocks that might otherwise threaten the achievement of the macroeconomic targets," the BOJ said late Wednesday, announcing the adjustments after market close.
At mid-August, its total foreign assets stood at J$215 billion (US$2.5b).
The central bank has cut a cumulative 250 basis points from its policy rate since January. The market is even more of a convert to a low interest rate regime, outdoing the central bank by bidding the T-bill rates 789 basis points and 856 basis points lower calendar year to date, on the three-month and six-month instruments, respectively.
For every one percentage-point cut in signal rates advanced this year by the BOJ, the market reciprocated by accepting, on average, 3.3 percentage-point lower returns on risk-free securities, according to Financial Gleaner estimates.