Jamaican Interest Rates Plunge

UNCLAS KINGSTON 000390

SIPDIS

STATE FOR WHA/CAR/ (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: Jamaican Interest Rates Plunge



1. The Bank of Jamaica (BOJ) has reduced interest rates
on all its open market instruments effective February 7,

2005. While this reduction is the first for 2005, it
represents the twelfth such decline in just over a year.
Interest rates have moved from 21 percent in November 2003
to the current rate of 13.5 percent. These latest
reductions, which range from 0.3 to 0.5 percentage points
on short and long-term instruments, respectively, have
also brought interest rates to their lowest levels in over
a decade.


2. The rate adjustments were not surprising, as declining
treasury-bill yield had already signaled the markets'
anticipation of further cuts reflecting the continued
improvement in the country's macro-economy. In
particular, there have been robust foreign exchange flows
from tourism and foreign investment. This has served to
shore up stability in the foreign exchange market as well
as adding to the stock of Net International Reserves
(NIR),which now stands at USD 1.9 billion, a level the
BOJ suggests is more than adequate to underwrite near term
stability. The foreign exchange market is now
experiencing its longest period of stability in over six
years and the stock of NIR is at its highest level in over
three years.


3. In addition to the foregoing, the Bank of Jamaica is
also upbeat about the near term prospects for economic
growth, particularly given the rebound in agriculture
following Hurricane Ivan. The Bank is also forecasting a
marked slowdown in inflation during the first quarter of
2005 and a return to single digit inflation during fiscal
year 2006/07.

TIGHE