BANK OF JAMAICA TIGHTENS MONETARY POLICY FURTHER
While the key drivers of inflation and other economic indicators are trending in the right direction, conditions have not sufficiently solidified to ensure that inflation is sustainably on a downward path.
Bank of Jamaica is also concerned about the slow pace at which interest rates on local currency deposits and loans have responded to its policy signals. In a context where the Bank’s policy rate has increased by 500 basis points (bps) between end-September 2021 and end-July 2022, the weighted average deposit rate offered by deposit-taking institutions (DTIs) to the public has increased by only 37 bps.
In addition, the pace of monetary tightening among Jamaica’s main trading partners has accelerated. On 21 September 2022, the Federal Reserve Board (Fed) raised its interest rate target by 75 bps, 25 bps more than anticipated by the Bank. The Fed also changed its forward guidance to signal that interest rates could rise to 4.4 per cent by end-2022 and to 4.6 per cent by end-2023, compared to its previous median projections of 3.4 per cent and 3.8 per cent, respectively. This more aggressive stance could result in US dollar assets becoming more attractive relative to those denominated in Jamaican dollars, which could cause capital outflows, prompting a faster pace of exchange rate depreciation and, consequently, a derailment of the Bank’s efforts to manage inflation.
Bank of Jamaica, therefore, is announcing its unanimous decision to increase the policy interest rate (the rate offered to deposit-taking institutions on overnight placements with BOJ) by 50 bps to 6.50 per cent per annum, effective 30 September 2022. The Bank also decided to continue pursuing other measures to contain the Jamaican dollar liquidity expansion and to maintain relative stability in the foreign exchange market. To ensure that individual depositors are encouraged to continue to save in Jamaican dollars, Bank of Jamaica is also considering further measures to support upward movements in DTIs’ deposit rates.
The Bank’s current decision has resulted in a cumulative increase in the policy rate of 600 bps since October 2021. These interest rate adjustments, in conjunction with the Bank’s decisive actions in the foreign exchange market over the period to date, have contributed to maintaining stability in the foreign exchange market. Without these actions, imported inflation and hence the final prices faced by Jamaican consumers would have been higher. The Bank’s gross reserves have remained comfortably above the level considered adequate, reinforcing its ability to support the foreign exchange market as needed. At 27 September 2022, Jamaica’s gross reserves amounted to US$4.3 billion, representing approximately 125.6 per cent of the projected IMF’s Assessing Reserve Adequacy (ARA) measure for FY2022/23.
The Bank also considered the following incoming data in arriving at its decision:
- The annual point-to-point inflation rate at August 2022 of 10.2 per cent was similar to the July 2022 outturn. However, core inflation at August 2022 (measured as inflation less fuel and food prices (CPI-FF)) of 8.3 per cent was marginally higher than the July 2022 outturn.
- Average daily crude oil prices fell by 8.3 per cent in August 2022, below the Bank’s forecast but liquefied natural gas (LNG) prices increased by 23.3 per cent for the month. This latter uptick was in contrast to a decline of 16.0 per cent anticipated by the Bank.
- Average grains prices (wheat, corn, soybean) fell faster than expected for August 2022 but there are indications that the price of sugar on the world market may rise over the short term. The Bank expects that, consistent with global consensus forecasts, commodity prices (oil and grains) will continue to fall over the next year.
- The Jamaican economy continues to perform creditably and the likelihood that GDP for FY2022/23 will grow by 2.5 to 4.5 per cent remains high. GDP grew by an estimated 5.0 to 6.0 per cent for the June 2022 quarter, driven by continued strong growth in Tourism and its allied services, as well as higher agricultural production. For the September 2022 quarter, growth of 2.5 to 3.5 per cent is anticipated, which continues to signal a healthy rebound in economic activity.
The Bank will closely monitor the global and domestic economic environment and is prepared to act as necessary to ensure a downward track for inflation.
A summary of the MPC’s discussions influencing the monetary policy decision has been published on the Bank’s website at https://boj.org.jm/core-functions/monetary-policy/policy-schedule/summary-of-decisions/.
The date of the next policy decision announcement is 18 November 2022.
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