FINANCIAL POLICY COMMITTEE STATEMENT
On the occasion of its meeting on 06 December 2023 and on its review of the financial system’s performance and systemic risks based on data up to August 2023, the Financial Policy Committee FPC issues the following statement:
Macro-financial conditions remained broadly stable for the September 2023 quarter. This was reflected in the Bank’s composite index of macro-financial performance, which exhibited moderate improvement. Measures of systemic risks associated with the financial cycle and the system’s exposure to other financial actors, as well as to selected sectors of the real economy, also remained within reasonable parameters. By extension, standard indicators of financial health for the deposit-taking institutions (DTIs), in particular, capitalisation, liquidity, profitability and asset quality measures were generally stable and in line with recent trends.
Several positive macroeconomic developments supported the stability in the financial system for the September 2023 quarter. The Jamaican economy is estimated to have grown by 1.9 per cent for the quarter and reflected broad based growth. The unemployment rate fell to a historic low of 4.5 per cent at July 2023. Annual point-to-point inflation moderated to 5.9 per cent at September 2023, relative to 6.3 per cent at June 2023. While inflation in the United States trended upward to 3.7 per cent at end-September 2023, relative to 3.0 per cent at end-June 2023, underlying or core inflation remained stable.
Notwithstanding the stable macro-financial environment, there are risks that domestic inflation could again breach the upper limit of the central bank’s inflation target in the near future. Moreover, inflation among Jamaica’s major trading partners could be sustained above their targets for longer than currently anticipated. Geopolitical tensions could cause imported prices to reverse directions while the tight domestic labour market, among other factors, could put upward pressure on inflation in Jamaica through higher-than-projected future wage adjustments.
As such, further monetary policy tightening could be required to ensure a sustainable return of inflation to policy targets. The risk of higher interest rates implies the potential for increased funding costs and fair value losses for financial institutions.
In this context, stress tests were conducted to determine the impact on balance sheets of domestic financial institutions of further increases in bond yields. The results of the assessment showed that the DTI and securities dealers’ sectors were broadly resilient to the contemplated interest rate shocks. However, there continued to be instances of vulnerability, which would need to be remedied by additional capital injections.
Other potential near-to-medium term risks include cyber risk and climate-related financial risks. The Supervisors have noted the spate of cyberattacks on financial institutions in the recent past and have enhanced their monitoring of the system, working closely with their licensees to ensure that their customers’ banking experience continues to be safe and efficient. In this regard, the Authorities will separately issue a set of principles that financial institutions will follow in addressing vulnerabilities to cyber events. Supervisors are also consulting with their licensees and actively encouraging mechanisms among them for strong cyber-attack resistance and cyber-attack recovery.
The Supervisors also noted the risks that climate change and associated systemic risk factors pose to the economy and, by extension, to the financial system. Therefore, the Authorities will separately publish a set of commitments that they will pursue to enhance the climate resilience of the financial sector over the medium-term. More broadly, the Supervisors of the financial sector will continue to determine the most appropriate policy response to minimise risks and to promote financial system stability.
Financial Policy Committee
06 December 2023
