BANK OF JAMAICA MAINTAINS POLICY RATE AMID DOWNWARD TREND IN INFLATION
Notwithstanding a continued downward trend in headline inflation to 5.8 per cent at April, the Monetary Policy Committee (MPC), at its meetings on 17 and 18 May 2023, unanimously agreed to continue to hold the policy interest rate (the rate offered to deposit-taking institutions (DTIs) on overnight placements with Bank of Jamaica) at 7.0 per cent, to maintain tight Jamaican dollar liquidity and to foster relative stability in the foreign exchange market.
The decisions were informed by the MPC’s view that, although the incoming data were generally positive, the inflation rate may temporarily rise again above the Bank’s inflation target range over the next three to four months. The Committee was satisfied that its monetary policy actions since October 2021 have been effective in achieving their objectives but noted the need to maintain the policy stance until inflation is firmly contained within the 4.0 to 6.0 per cent corridor.
The MPC noted that domestic inflation has continued to ease, consistent with the Bank’s monetary policy stance and international developments. Jamaica’s headline inflation rate at April 2023 of 5.8 per cent was marginally below the Bank’s expectations and represented a return to the target range for the first time since July 2021. Core inflation (which excludes food and fuel prices from the Consumer Price Index) at April 2023 of 5.7 per cent was well below the outturn of 8.4 per cent at April 2022. The key external drivers of headline inflation, such as grains, fuel and shipping prices, continued to decline, broadly in line with the Bank’s expectations. In addition, inflation expectations continued to track downward. As anticipated, the pace of monetary tightening by the United States (US) Federal Reserve Board (Fed) has slowed, and recent developments suggest that interest rates in the US are at or near their peak.
In reviewing the impact of previous monetary policy decisions, the MPC took note of the fact that interest rates in the domestic money and capital markets and the term rates offered on deposits by DTIs have generally increased in line with the policy rate, and the DTI sector continued to make small adjustments to rates on saving deposits and loans. Respondents to Bank of Jamaica’s Quarterly Credit Conditions Survey also indicated that credit terms were expected to tighten further for the June 2023 and September 2023 quarters. The flow of new loans to the private sector has also declined appreciably in real terms over the six months to March 2023 by 6.5 per cent and generally reflects the impact of higher interest rates and the tightening in credit conditions. The MPC was of the view that the maintenance of tight liquidity in the financial system and the preservation of relative stability in the foreign exchange market have had a significant impact on limiting the pass-through of imported inflation to inflation in the Jamaican economy. In addition, in the context of the stability in the foreign exchange market, deposit dollarisation continued to trend downward.At the same time, the MPC noted that the domestic banking system remains sound with adequate capital and liquidity.
There are likely to be temporary upticks in inflation above the target range during the June and September 2023 quarters, affected by recent increases in the cost of communication services, the national minimum wage, seasonally higher agricultural prices as well as pending increases in other regulated prices such as transport costs. However, consistent with global consensus forecasts for a fall in commodity prices and the Bank’s overall monetary policy stance, and in the absence of new shocks,inflation is projected to generally trend back towards the Bank’s inflation target range of 4.0 to 6.0 per cent by the December 2023 quarter.
The risks to the inflation outlook are 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. Further, higher-than-projected interest rates among major developed economies could worsen the interest differential, increase the pace of depreciation in the exchange rate and cause higher inflation. Among the factors that could lead to lower-than-projected inflation, weaker-than-expected global growth could negatively affect domestic demand, and some projected adjustments to regulated prices may not materialise.
The Jamaican economy continues to grow strongly. Gross domestic product (GDP) for fiscal year 2022/23 is projected in the range 4.0 to 5.5 per cent, in line with the range previously anticipated by the Bank. There are signs that the economy continued to expand for the June 2023 quarter and GDP growth for FY2023/24 is projected to moderate between 1.0 and 3.0 per cent.
Future monetary policy decisions to maintain inflation within the Bank’s target range 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 29 June 2023.
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