Apr 2006 Financial News

Bank of Jamaica (BOJ) pulls long-term repos

Apr 21, 2006

The Bank of Jamaica on Tuesday issued a notice that it would stop offering its 270 and 360-day reverse repurchase agreements (repo).

Repos are monetary policy tools used by the Bank of Jamaica. A repo involves the central bank selling a government security it owns and agreeing to buy back the same security at a specified rate at an agreed future date.

Industry expert, Clay Moodie who is general manager at Dehring, Bunting & Golding Unit Trust, hypothesizes that the "next move from the BOJ is the introduction of a new lower rate one-year repo. I think we would see a one year rate of 13 per cent or less."

Cedric Stewart, JMMB director and manager of the Tropical Plaza branch, said, "From the government's perspective, it is good that they are in a position to stay at 180 days and below for its repo offerings. It shows that the government doesn't have a liquidity problem. And it is assumed that you could see a slight reduction in interest rates, but nothing drastic. For example, you could see the 30 day repurchase agreement come down to 10 per cent."

INTEREST RATES

Mr. Moodie explains the reason Government is in a position to lower interest rates.

"Interest rates have room to go lower because inflation has been tempered. The U.S. has indicated that it will be slowing their interest rate hikes, and Jamaica has reached its maximum taxation capacity as revenues from general consumption tax have not met projections."

Mr. Stewart adds, "I figure that the BOJ wants to send a message that there is a lot of confidence within the system."

EQUITY MARKET

"And government will see tremendous interest cost savings plus, from our whole international credit worthiness standpoint it will send a strong signal that the economy is robust and that Jamaica is willing to stick to fiscal prudence."

Therefore, the result of lowered interest rates, according to the financial markets focussed experts is a rise in stock prices.

Mr. Moodie notes, "The equity market has been looking for some breathing room for some time and I had been expecting lowered interest rates since January.

But why will this spark the stock market? Mr. Moodie explains, "You have to take into consideration that for the last 12 months the market has been quiet. People are looking at value now and the lower interest rates should improve the equity appetite."

Mr. Stewart says, "With the BOJ not offering a medium to long term financing, a portion of that money should impact the stock market positively. If the last two days are anything to go by, you might see the gestation period of the bull run."

However, there is the possibility that this will all come to nothing.

NOT FIRST TIME

Sonia Owens, investment trading manager at Barita Investments, said, "Those two repos weren't the original members of the repo family created by the BOJ. These instruments were introduced to bring stability into the money market. They were introduced as monetary tools to manage interest rate changes in response to shocks to the system."

Ms. Owen also notes that, "It is not the first time these instruments have been withdrawn. In October 2003, the nine-month (repo) was withdrawn for a week. However, it was re-instated in the same month."

Mr. Stewart added, "Yes, the long term repos have been withdrawn before, so it is nothing new."

And Ms. Owen offers an alternative view to the lower interest rate scenario. "I believe the withdrawal of the one year repo was to encouraged people to buy more of the ten year variable rate bond recently offered. This bond then can be the underlying asset of any long term repo that brokers offer to their clients."

Denise Williams
Jamaica Gleaner
Friday, 21st April, 2006.
http://www.jamaica-gleaner.com/gleaner/20060421/business/business4.html