Oct 2016 Financial News

BOJ sets overnight rate at 3%; seeks to rein in money market rates

Oct 19, 2016

The Bank of Jamaica (BOJ) has started transitioning its policy rate to an overnight interest rate, replacing use of the benchmark 30-day certificate of deposit (CD).

On September 1, the Bank increased the rate on the overnight deposit from 0.25 per cent to 3.0 per cent.

Local bankers who have declined to discuss the impact on their operations nevertheless noted that the move is consistent with what already obtains in many other countries across the globe, as the central bank adjusts its initial interest rate corridor (IRC) as a route to tighter monetary policy.

An IRC is a system for guiding short-term market interest rates towards the central bank target/policy rate.

It is made up of the rate at which the central bank lends to banks (typically an overnight lending rate) and a rate at which it takes deposits from them (deposit rate).

The IRC system is intended to help ensure that money market interest rates stay within close range around the policy rate.

The BOJ, in its notice of the changes to local financial institutions, said actions to be taken over a six-month period from September 1 include changes in the frequency of the offer of the 30-day instrument.

Effective October 3, the bank began to offer 30-day CDs in unlimited amounts on three days of the week: Monday, Wednesday and Friday. Additionally, the 365-day CD, issued by competitive multiple-price auctions resumed once weekly.

The BOJ said what will follow will be adjustment to the volume, frequency and price determination of the 30-day instrument.

“At the end of the process, the 30-day rate will cease being the bank’s policy rate,” it said, adding that changes in the stance of monetary policy will thereafter be signalled by changes in the overnight deposit rate.

The central bank asserted that the new overnight rate reflected “interest rate neutrality relative to the current signal rate of five per cent payable on 30-day CDs”.

The BOJ said its motivation was to strengthen the relationship between the policy rates and money market interest rates and effect more direct linkage to inflation.

In this instance, the central bank noted that, the IRC is defined using the overnight tenor for central bank instruments, with the overnight deposit rate forming the floor of the IRC and the interest rate on the Standing Liquidity Facility (SLF) serving as the ceiling of the IRC.

The width of the IRC will be determined by the interest spread for accessing liquidity through the SLF.

The BOJ said that following the completion of these adjustments, the bank may effect “further changes as deemed appropriate to define a suitable width for the IRC for Jamaica’s monetary policy system”.

It also noted that the current provision of short-term liquidity through competitive multiple-price auctions will remain as a part of the monetary policy framework.

Source:
BY AVIA COLLINDER
collindera@jamaicaobserver.com
Business reporter
Jamaica Observer
Wednesday October 19, 2016    

http://www.jamaicaobserver.com/business/BOJ-sets-overnight-rate-at-3---seeks-to-rein-in-money-market-rates_77038