On the occasion of its meeting on 05 July 2023 and on its review of the financial system’s performance and systemic risks based on data up to March 2023, the Financial Policy Committee issues the following statement:
In a context of overall improvement in domestic macroeconomic conditions, risks remained contained. This was largely reflected in moderate improvements in composite indices of financial conditions. Systemic risks associated with financial cycles and the system’s exposure to other financial actors, as well as to selected sectors of the real economy, also continued to be moderate. Additionally, data up to end-March 2023 indicated that financial institutions continued to be adequately capitalised, liquid and profitable.
Several positive domestic and external macroeconomic developments supported the stability in the financial system for the March 2023 quarter. The Jamaican economy grew by 4.2 per cent for the quarter and reflected growth in most economic sectors. Furthermore, the annual point-to-point inflation rate for Jamaica decelerated to 6.2 per cent at end-March 2023, which was below the outturn of 9.4 per cent recorded at end-2022. Likewise, in the United States, inflation trended downwards to 5.0 per cent at March 2023, relative to 6.5 per cent at end-2022. Concurrently, during the quarter, Bank of Jamaica maintained its decision to hold its policy interest rate at 7.0 per cent while the Federal Reserve of the United States (FED) slowed its pace of interest rate increase.
In a context where inflation began to recede in late 2022, real interest rates for both Jamaica and for several advanced economies have begun to trend upwards and there remains a risk that more policy tightening may be required to assure a permanent return of inflation to policy targets. Past policy rate increases in the US has already begun to adversely affect selected sectors of that economy. If the Fed renews its monetary tightening policy stance, this could lead to the US economy falling faster into a recession.
In this regard, stress tests were conducted to ascertain the impact on balance sheets of domestic financial institutions of further increases in bond yields as well as deteriorating loan quality in the DTI sector resulting from a potential recession in the US.
The assessments show that the DTI and SD sectors are resilient to the risks associated with the contemplated interest rate and credit risk shocks. However, there remains instances of vulnerability, particularly to further increases in interest rates, which would need to be remedied by additional capital injections.
Financial Policy Committee
05 July 2023
