BANK OF JAMAICA IS ENCOURAGED BY THE RECENT TRENDS IN INFLATION
Bank of Jamaica (BOJ) is encouraged by the direction of the last three CPI reports. Having peaked earlier and lower than expected in April 2022, inflation at May and June were both 10.9 per cent, followed by 10.2 per cent at July. Declining international commodity prices, relative stability in the exchange rate and higher interest rates, have allowed for this trend. The Bank, however, believes that the conditions that led to these inflation outturns have not sufficiently solidified to ensure that inflation is sustainably on a downward path.
The Bank, therefore, announces its decision to increase the policy interest rate (the rate offered to deposit-taking institutions on overnight placements with BOJ) by 50 basis points (bps) to 6.00 per cent per annum, effective 19 August 2022. The Bank also decided to continue pursuing other measures to contain Jamaican dollar liquidity expansion and to maintain relative stability in the foreign exchange market. The Bank will continue to closely monitor the global and domestic economic environment and is prepared to pause its monetary policy tightening if the incoming data continues to reflect a downward track for inflation.
The Bank’s current decision has resulted in a cumulative increase in the policy rate of 550 basis points since October 2021, which has taken the policy rate to a level that the Monetary Policy Committee tentatively considers to be appropriate. Since October 2021 to date, the Bank, while maintaining a flexible exchange rate, has taken strong actions in the foreign exchange market including an adjustment to the Net Open Position limits for deposit-taking institutions (DTIs) and the sale of foreign exchange to the market, when necessary. These policy actions have contributed to the maintenance of stability in the foreign exchange market and, without them, imported inflation and hence the final prices faced by consumers would have been higher. The Bank’s gross reserves have remained comfortably above the level considered adequate, which reinforces its ability to support the foreign exchange market as needed.
The measures are expected to cause interest rates on deposits and loans to rise further, making savings in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive. They are also expected to reduce the demand for foreign currency, leading to a relatively more stable exchange rate. The measures are also intended to constrain aggregate demand in the economy and, consequently, limit the ability of businesses to pass on price increases to consumers. Some DTIs have commenced adjusting interest rates on deposits and loans.
Inflation is projected to generally stabilise over the remainder of the year, consistent with consensus forecast for a fall in commodity prices and the Bank’s overall monetary policy stance. This means that, absent any new shocks, the public should see annual inflation rates each month between 9 per cent and 11 per cent for the remainder of 2022. Inflation is also projected to fall to single digits in early 2023 and to enter the Bank’s target range by the end of 2023, as long as the conflict between Russia and Ukraine do not escalate and inflation among Jamaica’s trading partners continue to fall.
A summary of the discussions influencing the monetary policy decision by the MPC has been published on the Bank’s website at https://boj.org.jm/core-functions/monetary-policy/policy-schedule/summary-of-decisions/. The factors influencing this monetary policy decision will be discussed at the Bank’s Monetary Policy Press Briefing, scheduled for Friday, 19 August 2022 at 10:00 am.
The date of the next policy decision announcement is 29 September 2022.
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