Summary of Decisions – 28 March 2023

Summary of
Monetary Policy Discussion and Decision
March 2023

At its meetings on 27 and 28 March 2023, the Monetary Policy Committee (MPC) noted the following:

1. Inflation continued to ease, consistent with Bank of Jamaica’s monetary policy and international developments. Jamaica’s inflation rate at February 2023 of 7.8 per cent was below the rate of 8.1 per cent at January 2023. The February outturn was the lowest rate since December 2021.
2. 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.
3. Core inflation (which excludes food and fuel prices from the Consumer Price Index) at February 2023 also decelerated to 6.6 per cent from 7.1 per cent at January 2023 and is projected to fall further as monetary policy remains tight.
4. Annual inflation is projected to continue to fall to the Bank’s inflation target range of 4.0 to 6.0 per cent by the December 2023 quarter. One-off regulated price adjustments may, however, result in a temporary uptick in inflation.
5. Interest rates in the domestic money and capital markets as well as term rates offered by the deposit-taking institutions (DTIs) have generally increased in line with the policy rate. However, the DTI sector continued to make only marginal adjustments to saving deposit and lending rates. Between October 2021 and January 2023, the weighted average deposit rate offered by commercial banks to the public increased by 67 basis points (bps). However, the overall weighted average lending rate to the private sector on local currency loans was 11.6 per cent at January 2023, 12 bps below the rate at September 2021. Preliminary survey data indicate that these rates will be adjusted upward by marginal amounts in the near future. Notwithstanding the slow response of selected saving and lending rates to monetary policy signals, respondents to Bank of Jamaica’s Quarterly Credit Conditions Survey indicated that banks tightened credit terms for the December 2022 quarter. Credit terms are expected to tighten further for the March 2023 and June 2023 quarters.
6. Growth in the monetary aggregates has also been tempered. Local currency deposits grew by 13.7 per cent at January 2023, an acceleration in the growth rate relative to 12.6 per cent at December 2022 but below the estimated growth in nominal GDP for the March 2023 quarter.  Growth in loans and advances at January 2023 accelerated to 12.8 per cent from 6.2 per cent a year earlier.
7. As expected, the pace of monetary tightening by the United States (US) Federal Reserve Board (Fed) slowed and recent developments in the US banking system suggest that interest rates are near the peak.
8. The banking system remains sound with adequate capital and liquidity.

Notwithstanding these positive developments, the MPC noted that the risks to the inflation outlook remain elevated. In a context where the domestic economy continues to grow, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation. Higher inflation could also result from a worsening in supply chain conditions and higher commodity prices if there are further geo-political disruptions. 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.

Therefore, to continue underpinning inflation returning to the target range and to underwrite continued stability in the foreign exchange market, the MPC unanimously agreed to hold the policy interest rate at 7.00 per cent, to maintain tight Jamaican dollar liquidity in the money market and to continue fostering relative stability in the foreign exchange market. The Bank’s liquidity management strategy incorporates the impact of the one percentage point increase in the domestic and the foreign currency Cash Reserve Requirements applicable to DTIs, effective 01 April 2023.  

The MPC reiterated that future monetary policy decisions to return inflation to the Bank’s target range will depend on the incoming data. The MPC also expressed its commitment to the continued review of the monetary transmission mechanism to ensure that  monetary policy achieves the desired impact on inflation. 

The following considerations also informed the MPC’s decisions:

1. The trend in inflation has generally tracked in line with the Bank’s expectations. The annual point-to-point inflation rate at February 2023 of 7.8 per cent was lower than the outturn at January 2023 (see chart below). The inflation rate at February 2023 primarily reflected upward movements in the Food and Non-Alcoholic Beverages, Restaurants and Accommodations Services, as well as Housing, Water, Electricity and Other Fuels. The annual increase in Food and Non-Alcoholic Beverages was largely the result of higher prices for cereals, cereal products and vegetables. The increase in the Restaurants and Accommodations Services categories primarily reflected the lagged impact of international commodity prices. In this context, core inflation at February 2023 (measured as inflation less fuel and food prices (CPI-FF)) of 6.6 per cent, was lower than the January 2023 outturn. 
   

2. Consistent with global consensus forecasts for a fall in commodity prices, the Bank’s overall monetary policy stance, and in the absence of new shocks, inflation is on track to continue falling in 2023. Selected indicators support this outlook over the next 3 to 6 months. International fertilizer prices fell by an average monthly rate of 12.3 per cent for January to February 2023. The average of daily West Texas Intermediate (WTI) crude oil and Liquified Natural Gas (LNG) prices trended below the Bank’s forecast for January and February 2023, with the latter significantly declining by an average monthly rate of 34.8 per cent, relative to the Bank’s projections for a smaller decline. Similarly, WTI prices increased by an average monthly rate of 0.1 per cent for the period compared to the Bank’s projection for a moderately higher increase. Average grains prices (wheat, corn, soybean) also increased at a slower pace than expected for the two-month period.
3. The business sector’s expected inflation 12-months ahead remained at 11.5 per cent at the November 2022 survey. Survey respondents indicated that changes in the external price of imported goods were the most important factor influencing inflation expectations. Inflation expectations should continue to fall as import prices decline and domestic monetary policy actions take effect.
4. The Jamaican economy continued to perform creditably and the likelihood that gross domestic product (GDP) for the fiscal year 2022/23 will grow by 4.0 to 5.5 per cent remains high. GDP grew by an estimated 3.0 to 4.5 per cent for the December 2022 quarter, driven by continued strong growth in Tourism and its allied services and Manufacturing, Installation and Agriculture. For the March 2023 quarter, a 4.0 to 5.0 per cent growth is anticipated.
5. GDP growth in the US for the December 2022 quarter is likely to be slightly higher than the Bank’s projection. However, the impact of higher inflation on consumption and tight monetary conditions may weigh on growth in 2023. In addition, US growth could be impacted by adverse developments in the US banking sector.
6. Inflation in the US decelerated to 6.0 per cent at February 2023 which, while projected to remain elevated relative to the Fed’s target, is expected to continue to fall over time.
7. On 22 March 2023, the Fed raised its interest rate target by 25 bps and signalled that further movements would be dependent on the extent to which adverse developments in the banking system tighten credit conditions. These adverse developments led the Fed to guarantee all deposits and establish a new short-term lending facility. On 19 March 2023, the Fed along with 5 large central banks announced a coordinated action to enhance the provision of liquidity via standing US dollar liquidity swap line arrangements as a backstop to ease strains in global funding markets. These measures were aimed at maintaining confidence in the banking system.
8. The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
9. The MPC will continue to closely monitor the global and domestic economic environments for potential risks that could threaten Jamaica’s inflation target.

_____________________

Chairman of the MPC

29 March 2023