US embassy cable - 05KINGSTON830

UNCLAS KINGSTON 000830 
 
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: JAMAICA'S INTEREST RATES DROP TO RECORD LOW 
 
 
1.  The Bank of Jamaica (BOJ), on March 7, reduced the 
rates on open market instruments for the second time this 
year.  This is a continuation of the trend started in 
2004, when interest rates were slashed eleven times. 
Interest rates have now moved from a high of 36 percent on 
365-day instruments at the end of March 2003 to 14.95 
percent in March 2005.  The overall rate cuts, which range 
from 0.5 percentage points to 0.55 percentage points have 
brought interest rates to their lowest levels since 
February 2003.  Declining interest rates are an important 
ingredient in the GOJ's medium term program as, in 
addition to reducing debt-servicing costs, it sets the 
stage for increased private sector borrowing and, by 
extension, economic expansion.  Reduced interest rates 
should also boost consumer credit, thereby stimulating 
demand for goods and services. 
 
2.  According to the Bank of Jamaica (BOJ), the interest 
rate adjustments were underpinned by steady improvement in 
Jamaica's macroeconomic indicators.  In particular, the 
exchange rate has remained stable since the beginning of 
the year reflecting buoyant foreign exchange inflows from 
tourism and remittances.  Tourism receipts amounted to USD 
1.4 billion in 2004, up 6.4 percent, while remittances of 
USD 1.5 billion increased by 15.5 percent over 2003. 
These combined with strong bauxite/alumina earnings led to 
a USD 8.5 million improvement in the country's current 
account balance.  These inflows have led to a build-up in 
the stock of net international reserves, which remain 
around USD 1.8 billion, a level the BOJ argues is adequate 
to underwrite near term stability.  Prices are also 
expected to moderate in the upcoming fiscal year, which 
begins in April.  Going forward, the Bank expects the 
macroeconomic fundamentals to continue, if not improve. 
The central bank also said it remained firmly committed to 
preserving orderly conditions in the money and foreign 
exchange markets. 
 
3.  Financial analysts have traditionally argued that 
investors would switch to US Dollars once Jamaican 
interest rates reached 16 percent.  However, despite the 
reduction in risk premium accompanying the lower interest 
rates, investors have not rushed to the foreign exchange 
market. This suggests increasing levels of confidence in 
the Jamaican economy.  In addition, the stock market has 
not reacted to the reductions in interest rates, 
indicating that investors had already factored the lower 
interest rates into their investment decisions. The 
improvement in the economic fundamentals and interest rate 
reductions in particular could very well strengthen 
veteran Minister of Finance and Planning Omar Davies' 
increase his chances of making a serious bid for the 
presidency of the People's National  and, ultimately, 
Prime Minister. 
 
TIGHE