The Bank of Jamaica (BOJ) yesterday raised the cash reserve requirements on all banks in order to mop up liquidity and stem the slide of the Jamaican dollar. But the move – the second such this month – was greeted by realisation among bankers that while it would drive up interest rates in the short term, the BOJ’s options were limited.

“This decision by the BOJ now means that the cost of money in Jamaica is going to go up, which will undoubtedly impact interest rates in the short term,” CEO of Jamaica Money Market Brokers Group (JMMB) Keith Duncan told the Observer last night.

“With reduced liquidity, people will now be scrambling to hold on to their cash, particularly US dollars and other assets,” added Duncan. “JMMB and other institutions will now have to pay a higher cost for their funds. With limited options, the governor of the BOJ now feels it necessary to take money out of the system to reduce the demand for the US dollar.”

Anya Schnoor, president of the Jamaica Securities Dealers Association who is the senior vice president, wealth management for ScotiaDBG, agreed.

“This move by the BOJ serves to tighten Jamaican dollar liquidity and will lead to an increase in interest rates to credit customers,” she said. “Banks will now have to borrow at a higher overnight rate.

The BOJ decision, which will take effect on January 2, 2009, will require commercial banks, merchant banks and building societies to raise their cash reserves from 11 to 13 per cent on Jamaican dollars and from 9 to 11 per cent on other currencies.

On December 3, the BOJ said that it would raise the cash reserve requirement on all banks from 9 to 11 per cent, which in effect would mean the liquid asset requirement would increase from 23 to 25 per cent.

Since the demise of Lehman Brothers and Bear Stearns, combined with the US financial crisis, the BOJ has made regular and consistent interventions to prop up the local dollar, but yet it continues to devalue. Measures such as the two-year US$-linked fixed instrument at 11.25 per cent floated by the Government, plus a special certificate of deposit did not provide the much needed relief expected.

Last Friday, the Jamaican dollar hit a new high of J$80.17 to US$1.

Last night, financial sector analysts suggested that this was perhaps the rationale behind the BOJ’s decision to yet again raise cash reserve requirements.

Their assessment is based on Central Bank governor Derrick Latibeaudiere’s stated commitment to stabilise the dollar and contain inflation. Analysts have been speculating that for the month of November Jamaica recorded negative inflation. But with the recent devaluation of the Jamaican dollar posing a threat to a reducing inflation rate, which has received a boost from falling oil prices and commodities, Latibeaudiere may well have felt it was timely to put up the cash reserves again.

Last night, the Observer was unable to contact Latibeaudiere for comment.

“When the Jamaican dollar hit J$80 to US$1 last week, I think that had a big effect on the psyche of the market and this may have led to the decision by the BOJ to increase the cash reserves of the banks,” said Schnoor.

“This is a supply and demand issue where cash is now king. This governor has done everything but throw in the kitchen sink in an effort to prop up the Jamaican dollar,” she said. “He has done things that no other governor has done before, such as a US$300-million facility to help securities dealers who require help as a result of this global financial crisis. He is trying to make buying Jamaican dollar instruments attractive. We now have to watch what we spend and cut out things that are non-essential.”

Schnoor further added that the Government will find it difficult to raise funds on the international capital markets and that turning to the multilaterals will help supply the market with US dollars.

President and CEO of Pan Caribbean Financial Services, Donovan Perkins described the BOJ’s move as an efficient way to pull money out of the system without it costing the BOJ.

“The Central Bank is concerned about currency volatility and instead of buying money at say 24 per cent to sure up the dollar, this move will cost it nothing,” said Perkins. “As far as US dollar reserves are concerned, this will help bolster the NIR, which has fallen from US$2.3 billion to US$1.7 billion. Pushing up cash reserves will act as a damper. The rise in interest rates will restrict consumer spending such as car loans and this will have a positive impact on the balance of payments.

Yesterday the Jamaican dollar revalued by 15 cents to close at J$80.02 to US$1.