BOJ announces measures to maintain order in financial system

Governor, Richard Byles, who noted that Jamaica’s financial system remains sound, said the interventions are aimed at ensuring adequate access to the Jamaica dollar and foreign currency, thereby augmenting fiscal measures already instituted by the Government in response to the pandemic.

He advised that the BOJ’s measures have resulted in $57 billion flowing into the system within the last week.

The Governor outlined details of the measures during a virtual press conference on Thursday (March 26).

In relation to foreign currency liquidity, Mr. Byles said the BOJ will continue to support the needs of businesses through direct sales to authorised dealers and cambios, as needed.

He advised, however, that the Bank has placed a hold on investment transactions requiring foreign exchange purchases.

Mr. Byles further indicated that the BOJ has temporarily increased the limit on authorised dealers’ foreign currency net open positions (FXNOP) by five percentage points, effective March 19.

“This effectively raises the limit on the positions of these institutions (either long or short) to 25 per cent of regulatory capital and allows authorised dealers to provide more foreign currency to their clients,” the Governor informed.

He also assured that the central bank stands ready to expand the volume of foreign currency swap arrangements with authorised dealers, “thereby providing them with more foreign exchange liquidity,” while informing that the stock of outstanding contracts, as at March 24, totalled US$86 million.

Regarding Jamaica dollar liquidity, Mr. Byles informed that the BOJ has commenced a bond-buying programme.

This, he explained, will see the entity purchasing Government of Jamaica (GOJ) securities on the secondary market from financial institutions that hold these instruments, while adding that the central bank is also prepared to redeem BOJ securities early.

As at March 25, the nominal value of GOJ instruments purchased by the BOJ and the early encashment of central bank instruments totalled $26.3 billion.

The Bank has also removed the limit on the amounts that deposit-taking institutions (DTIs) can borrow overnight without being charged a penal rate, effective March 18.

“Liquidity support to DTIs will, therefore, be made available on demand at the prevailing rate of 2.5 per cent, limited only by collateral,” the Governor outlined.

Meanwhile, effective Thursday (March 26), the BOJ has reintroduced a longer-term lending facility that will afford DTIs access to Jamaica dollar liquidity for up to six months.

Mr. Byles said this now enhances the institutions’ ability to secure their liquidity needs over a longer timeline.

The Governor further indicated that the central bank will be reactivating an intermediation facility that sees the BOJ utilising its balance sheet to facilitate transactions between holders of liquid balances and others requiring liquidity, if needed.

“This facility should support a more even distribution of liquidity in the financial system in a context where institutions that could not access interbank loans because of the limits placed on them by lenders can now do so indirectly with the central bank standing in the middle of the transaction,” he said.

Additionally, Mr. Byles said steps have also been taken to reactivate the Emergency Liquidity Facility that was established in 2015, upon application by any financial institution.

The Governor said against the background of the near-term outlook of significant challenges and heightened uncertainty consequent on COVID-19, “we believe that these measures will help to facilitate the smooth functioning of the credit market”.

Mr. Byles further stated that the BOJ is optimistic that the interventions will support inflation remaining within the four per cent to six per cent target over the ensuing eight quarters, in addition to augmenting the Government’s response to the pandemic.

“Our monetary policy measures, along with the Government’s fiscal stimulus, are aimed at mitigating the impact of this pandemic on the economy and supporting a speedy recovery once the crisis has passed,” he said.

The Governor indicated that the central bank will continue to closely monitor the impact of COVID-19 on the economy and “stands ready to deploy additional measures”.

These, he pointed out, include a reduction of the policy rate and cash reserves requirement to ensure the continued smooth flow of liquidity to all participants in the Jamaican financial system, “and to maintain orderly conditions within the foreign exchange market”.