Bank of Jamaica’s Monetary Policy Committee (MPC), at its meetings on 18 and 19 December 2023, unanimously agreed to maintain: (i) the policy interest rate (the rate offered to deposit-taking institutions (DTIs) on overnight placements with Bank of Jamaica) at 7.0 per cent, (ii) tight Jamaican dollar liquidity conditions, and (iii) relative stability in the foreign exchange market.
Jamaica’s annual headline inflation rate at November 2023 of 6.3 per cent was above the 5.1 per cent at October 2023 but much lower than the peak rate of 11.8 per cent recorded at April 2022. Core inflation (which excludes food and fuel prices from the Consumer Price Index (CPI)) was 5.6 per cent at November 2023, generally in line with the average for the past three months and lower than the 8.4 per cent recorded at April 2022. This trend suggests that core inflation is being contained, which bodes well for the longer-term inflation outlook.
Moreover, the key drivers of headline inflation, such as international commodity prices and shipping costs, continued to decline, and the exchange rate has remained generally stable, given the monetary policy actions as well as strong tourism and remittance inflows. Consistent with these trends, deposit dollarisation, which reflects the proportion of United States (US) dollar deposits to total deposits, continued to trend downward to its lowest level since December 2011. This positive trend reflects improving confidence in holding Jamaican dollars. With regard to commodity prices, international oil prices have trended below the Bank’s forecast, mainly due to the weaker-than-forecasted impact of production cuts by major oil producers. Average grains prices were also well below the Bank’s forecast and are expected to remain below projections over the near term. Inflation in the economies of Jamaica’s main trading partners has also continued to decline.
As anticipated by the Bank, the uptick in headline inflation in November 2023 was primarily driven by the impact of an increase in public passenger vehicle (PPV) fares announced by the Government. This is in addition to high domestic agricultural price inflation due to continued adverse weather conditions. The increase in inflation in November, consequent on these factors, marks the onset of temporary fluctuations in inflation outside the target band. Inflation is projected to continue to rise above the Bank’s target range for much of the period between the December 2023 and March 2025 quarters, primarily due to the continued impact of the increases in selected PPV fares. Without the effects of the PPV fare increase, it is estimated that annual headline inflation would have averaged 5.9 per cent during this period.
In the context of the positive trends in the key drivers of headline inflation, fairly stable core inflation and the expectation that the impact of the PPV fare increase will be temporary, the MPC decided to maintain the monetary policy stance.
However, the risks that inflation could be higher than forecasted are elevated. These risks include second-round effects from the PPV fare increases, sharper-than-anticipated increases in domestic agricultural price inflation over the near term, and higher-than-projected future wage adjustments in the context of the tight domestic labour market. A deterioration in supply chain conditions could also influence higher inflation. The main downside risks, which could lead to lower inflation, include the possibility that oil and grains prices could trend well below the forecast. Other downside risks also include weaker-than-expected global growth, which could have a stronger-than-projected downward pull on domestic demand and imported inflation, resulting in lower levels of price changes.
Future monetary policy decisions will, therefore, critically depend on incoming data related to the strength of the potential risks to inflation noted above. The Committee decided to maintain heightened surveillance of these risks and core inflation. The MPC is prepared to take the necessary actions, including further tightening of monetary policy, if the emerging upside risks to inflation highlighted above materialise.
A summary of the Monetary Policy Committee’s discussions, which influenced 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 20 February 2024.
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