BANK OF JAMAICA MAINTAINS POLICY RATE TO SUPPORT INFLATION REDUCTION
The Monetary Policy Committee (MPC), at its meetings on 27 and 28 June 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.
The decisions were based on the MPC’s view that recent developments, including significantly reduced inflation over the past several months, were generally positive but the risks to the inflation outlook remained. Jamaica’s annual headline inflation rate at May 2023 of 6.1 per cent was above the Bank’s target range but significantly lower than the 10.9 per cent at May 2022. Core inflation (which excludes food and fuel prices from the Consumer Price Index) at May 2023 of 4.2 per cent was also well below the outturn of 9.7 per cent at May 2022. The MPC decisions were therefore intended to ensure that Jamaica’s inflation rate continues to trend toward the target range of 4.0 to 6.0 per cent. The MPC’s decisions were also based on the following information and assessments:
- The May 2023 inflation outturn primarily reflected upward movements in Food and Non-Alcoholic Beverages as well as Housing, Water, Electricity and Other Fuels (HWEG). The annual increase in Food and Non-Alcoholic Beverages was largely the result of seasonally higher prices for vegetables, tubers, plantains, cooking bananas and pulses, as well as cereals and cereal products. The increase in HWEG was due to higher rates for electricity, reflecting a reversal of the temporary declines in April. These increases were tempered by declines in Water Supplies and Miscellaneous Services as well as Transport.
- The key external drivers of headline inflation such as grains, fuel and shipping prices, continued to decline and inflation expectations trended downward. As anticipated, the United States (US) Federal Reserve Board (Fed) paused its monetary tightening in June 2023 but suggested that interest rates could increase further.
- The MPC noted that the incoming data was generally positive but pointed out that the uptick in inflation above the target range is likely to continue for June and during the September 2023 quarter. This uptick is expected to be driven by recent increases in telephone and internet rates, the national minimum wage, seasonally higher agricultural prices as well as pending increases in other regulated prices such as transport.
- Consistent with global consensus forecasts for a further fall in certain commodity prices as well as the Bank’s overall monetary policy stance, and in the absence of new shocks, inflation is expected to decelerate to the Bank’s inflation target range of 4.0 to 6.0 per cent by the December 2023 quarter. The forecast assumes that inflation expectations will fall further as import prices decline and as past domestic monetary policy actions continue to restrain inflation.
- The Jamaican economy continues to grow. Gross domestic product (GDP) for fiscal year (FY) 2022/23 is estimated between 4.0 to 5.0 per cent, in line with the range previously anticipated by the Bank, despite the impact of drought conditions on the agriculture sector. GDP growth for FY2023/24 is projected to moderate between 1.0 to 3.0 per cent.
In reviewing the impact of its previous monetary policy decisions, the MPC continues to see, in addition to a general lowering of inflation, a relatively strong, lagged pass-through of its policy rate to interest rates in the domestic money and capital markets and in the term rates offered on deposits by DTIs. For April 2023, term rates on DTI deposits increased further by 22 basis points (bps) while borrowing rates by the Primary Dealers increased by 3 bps. The DTI sector also continued to make small adjustments to rates on saving deposits and loans, including mortgages. Respondents to Bank of Jamaica’s Quarterly Credit Conditions Survey indicated that, following a tightening of credit terms in the March 2023 quarter, credit terms were expected to again tighten for the June 2023 and September 2023 quarters. The flow of new loans to the private sector also declined in real terms by 12.7 per cent over the year to April 2023 and generally reflected the impact of higher interest rates and the tightening in credit terms. These developments will contribute to further downward pressure on inflation. In addition, in the context of the stability in the foreign exchange market and the higher yields on some domestic savings noted above, deposit dollarisation continued to trend downward.
At the same time, the MPC assessed that the domestic banking system remains sound with adequate capital and liquidity.
The risks to the inflation outlook remain balanced. Higher-than-projected future wage adjustments, a stronger-than-anticipated impact of climate change on domestic agricultural prices and a worsening in supply chain conditions could put upward pressure on inflation. Among the factors that could lead to lower-than-projected inflation, weaker-than-expected global growth could reduce domestic demand, and some projected adjustments to regulated prices may not materialise.
Future monetary policy decisions will depend on the incoming data. The Bank will continue to closely monitor the global and domestic economic environments for potential risks to Jamaica’s inflation rate.
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 18 August 2023.
