Monetary Policy Implementation

The target for inflation is set by the Bank of Jamaica and approved by the Minister of Finance. The target is then incorporated in a Financial Programme, which outlines and defines the main economic variables that are consistent with the inflation target. Targets for money supply and the NIR are also determined within this financial programme framework. From the money supply target, base money targets are derived through expectations for the money multiplier. Quarterly, monthly, weekly and daily targets for base money and the related aggregates are then derived from annual projections.

 

Daily monitoring of the monetary base provides the Bank of Jamaica with the ability to respond in a timely manner to changes in economic variables. An Operating Targets Committee reviews the financial flows that impact on the monetary base on a daily basis. Of importance are changes in the components of the monetary base, identifying the sources of liquidity and reviewing the foreign exchange trading activities from the previous day. Market intelligence via interaction with the financial institutions and authorized foreign exchange dealers also plays a critical role in assessing whether the developments in the money and foreign exchange market are short-lived or will exist over a protracted period. Having reviewed all the information, the committee decides on the level of open market operations that would result in a desired level of Jamaica Dollar liquidity, consistent with the short-term money targets.

On a weekly basis, the Economic Policy Committee (EPC) meets to review developments in the monetary base, Government cash flow position, activities in the foreign exchange market and other developments in the macro-economy. In recent years, particular attention has also been paid to the output gap and the deviation of inflation itself from the target, similar to what is done in inflation targeting regimes. The Operating Targets and Economic Policy committees (EPC) are comprised of technical officers within the Bank to review and make recommendations for the formulation of monetary policies. The Deputy Governor who is responsible for monetary stability chairs the Committee meetings. The Deputy Governor addresses the issues arising from the meetings and updates the Governor in a meeting with senior technicians on a weekly basis.

The EPC also convenes a special meeting on a monthly basis to examine the monetary policy stance. The discussions at this meeting also include an economic projection based on a model of the Jamaican economy. An analysis of current developments including an analysis of the information from the monetary and credit aggregates, interest rate spreads as well as interest rate and inflation expectations of participants in financial markets are also discussed. The recommendations are then discussed at a Senior Monetary Policy Committee Meeting comprising the Governor and Deputy Governors. The final recommendation is taken at this meeting.

A decision to change the stance of monetary policy is usually reflected in an adjustment to the rates paid on the Bank's certificates of deposit. These certificates have ranged in tenor from overnight to 365 days over the years. However since 12 January 2010, the Bank has only offered the 30-day tenor. This rate is regarded as the Bank's signal rate.  The volume of instruments issued by the BOJ at any one time strongly influences the level of liquidity in the banking system and the entire structure of interest rates.

The sale and redemption of BOJ instruments are conducted exclusively with Primary Dealers appointed by the Bank. Acquisition of BOJ instruments by other financial institutions as well as the general public takes place through these Primary Dealers. These institutions are also the main participants in primary issues of Government bonds.

In recent years the Bank has increasingly relied on communication in order to increase the transparency of its monetary policy action and anchor long term inflation expectations. A press conference is scheduled for each quarter at which the Bank releases its Quarterly Monetary Policy Report outlining the main factors influencing inflation during the quarter and the risks to the inflation forecast. The Bank’s perspectives on future economic trends are also presented along with explanations of its policy actions. The Governor also increasingly participates in events which allow the Bank an opportunity to shape inflation expectations, assist the public in understanding the operations of the Bank and reassure the public of the Bank’s commitment to fighting inflation.




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