The Bank of Jamaica (BOJ) on Friday cut interest rates by two percentage points on all its open-market instruments in anticipation of better performance in key economic indicators, underscored by a new International Monetary Fund (IMF) agreement that still has to be passed by the fund's board.

"The programme is underpinned by a package of policy measures geared towards fiscal and debt sustainability, which is expected to lay the foundation for a stable macroeconomic environment and sustained growth," said the central bank Thursday.

The central bank had indicated earlier that with an IMF agreement, it anticipated continued stability in the foreign-exchange market going forward, which would give it more of an incentive to lower rates on Friday.

stand-by arrangement

But the deal is not expected to be inked before next year, with the IMF's executive board to consider Jamaica's application for US$1.3 billion stand-by arrangement in early 2010.

The cut in rates will now bring down the Bank of Jamaica benchmark six-month certificate of deposit, the most expensive price instrument to 15 per cent, moving from 17 per cent when last adjusted in September.

With the change, the new central bank rates now range from a low of 10.50 on the 30-day certificate to 15 per cent on the 180-day tenor.

The BOJ has now cut a cumulative 6.5 points off rates in six adjustments this year.

At least one bank executive said that any interest-rate cuts by the commercial banks would not happen now but were likely to come following the signing of the IMF agreement.

"We always react to changes from the leadership of the Bank of Jamaica, but we will not do it immediately, but rather wait and do a wholesale change given that there are all indications of further reduction in interest rates," said Clovis Metcalfe, managing director of FirstCaribbean Bank.

"It's early days yet. We also await the signing of the IMF agreement so will watch and see over the next few weeks to react in a consolidated position."

Three commercial banks, RBTT, Scotiabank and FirstCaribbean, adjusted rates in the summer and the fall following movement in rates by the central bank, but prime rates still range from 19.87 to 21.75 per cent.

new tax package

The latest BOJ rate cut came hours behind the revelation of a new tax package designed to raise an annualised $21.8 billion, or an average of $5.45 billion per quarter, to take effect January 1.

The new measures are to help plug a $15 billion gap in tax collections and a wider $17.9 billion shortfall in taxes and grants.

But, the BOJ said while a temporary shock to inflation over the next three months arising from fiscal measures is expected, the longer-term outlook still points to single-digit inflation.

Annual inflation was at 7.8 per cent in October, and at 8.1 per cent for the calendar year.

"The increased access to concessionary external financing that the stand-by agreement with the fund would facilitate at least US$1.3 billion will significantly enhance the ability of the BOJ to maintain market stability," said the central bank.

sabrina.gordon@gleanerjm.com