Summary of Decisions – February 2024

Summary of
Monetary Policy Discussion and Decisions
February 2024

At its meetings on 16 and 19 February 2024, the Monetary Policy Committee (MPC) noted the following:

1. Jamaica’s headline inflation at January 2024 of 7.4 per cent continued to track upward relative to the outturns for the previous three months and was above the Bank’s target of 4.0 to 6.0 per cent. The higher-than-targeted headline inflation at January 2024 continued to largely reflect the impact of higher regulated prices, including the first of a two-part increase in public passenger vehicle (PPV) fares effective October 2023, as well as the effect of wage increases throughout the economy. The inflation outturn also reflected high agricultural food inflation. Partly offsetting the impact of these factors was a reduction in Jamaica Urban Transit Company fares. Given the shocks to headline inflation, core inflation (which excludes food and fuel prices from the Consumer Price Index (CPI)) was 5.9 per cent at January 2024, broadly consistent with the average for 2023 but lower than the 9.7 per cent and 7.1 per cent at January 2022 and January 2023, respectively.
2. The longer-term inflation outlook continues to be generally positive. Key drivers of headline inflation, such as inflation expectations and the exchange rate, have remained generally stable. Grains prices have also declined and are projected to continue to fall in the context of buoyant supplies.
3. The business sector’s expectation for inflation 12 months ahead increased marginally to 8.3 per cent in January 2024 from 8.0 per cent in December 2023. Survey respondents indicated that changes in the external price of imported goods continued to be the most critical factor influencing inflation expectations.
4. As a result of the above-noted price shocks, including the projected impact of the second phase of the PPV fare increase, which is scheduled to take effect in April 2024, inflation is forecasted to remain above the Bank’s target range over the March 2024 and June 2025 quarters. Without the impact of the second increase in PPV fares, inflation at December 2024 would fall within the target range of 4.0 – 6.0 per cent.
5. The risks to the inflation outlook remain elevated. On the upside, higher-than-projected second-round effects from the PPV fare increases, higher wage adjustments in the context of a tighter labour market and a further deterioration in supply chain conditions could influence higher inflation. In particular, shipping freight rates have recently risen amid ongoing geopolitical tensions and supply chain disruptions, which could eventually affect other prices such as grains and finished goods. The factors that could result in lower-than-projected inflation include weaker-than-projected global growth, which could reduce domestic demand and imported inflation resulting in lower levels of price changes.
6. Against the background of these developments, the MPC 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; and (ii) stability in the foreign exchange market. The MPC, however, decided to further tighten Jamaican dollar liquidity conditions.

The following considerations also informed the MPC’s decisions:

7. The Jamaican economy continues to expand, which supports increases in aggregate demand for goods and services. Despite the impact of adverse weather on the agriculture sector, real gross domestic product (GDP) for the December 2023 quarter is estimated to have grown within the range of 1.0 to 3.0 per cent, and there are signs that the economy continued to expand in the March 2024 quarter. The continued buoyancy in the economy is mirrored in the decline in the unemployment rate to a record level of 4.2 per cent as at October 2023 which, supported by anecdotal information about wage adjustments in selected private sector industries, indicates that the domestic labour market remains very tight.
8. The risks to the domestic GDP forecast over the next eight quarters are assessed as balanced, which means that actual GDP growth is likely to trend in line with the forecast. On the downside, growth in tourism and related activities could be adversely affected by headwinds to global growth. On the upside, a faster-than-anticipated pace of investment could increase aggregate demand.
9. Despite a restrictive monetary policy stance, the US economy has remained resilient. The Bureau of Economic Analysis’ advance estimate indicates that US GDP for the December 2023 quarter increased on an annualised basis of 3.3 per cent, following an expansion of 4.9 per cent in the September 2023 quarter. This stronger-than-projected performance supported higher equity prices and resulted in a lengthening in the market’s expectations about the easing of US Federal Reserve (Fed) rates. The Bank’s estimate for US GDP growth for 2023 is higher than previously forecasted but growth is projected to slow in 2024.This outlook reflects the impact of high, albeit decelerating, inflation on consumption, tight monetary conditions and reduced fiscal support. Inflation in the US was 3.1 per cent at January 2024, a decline relative to the December 2023 outturn. US inflation is projected to continue its general fall as the economy slows but is expected to remain above the Fed’s target of 2.0 per cent for 2024. 
10. As anticipated, the Fed continued to maintain its monetary policy target for interest rates at 5.25 – 5.50 per cent in January 2024, following its last increase in July 2023. The Fed also suggested that future monetary policy decisions will continue to be data-dependent.
11. The outturns for selected commodity prices have been mixed. The average of daily West Texas Intermediate (WTI) crude oil prices for December 2023 and January 2024 declined on average relative to the previous month by 2.3 per cent, mainly reflecting subdued demand and waning concerns about supply disruptions. Liquefied natural gas (LNG) prices declined at an average rate of 4.5 per cent over the same two-month period in the context of a decline in US LNG exports. Similarly, average grains prices (wheat, corn, soybean) declined by 0.7 per cent. In contrast, international fertiliser prices increased by an average monthly rate of 2.5 per cent.
12. The risks to the outlook for the US economy are balanced. On the downside, geopolitical tensions and the lagged impact of tight monetary policy could result in lower GDP growth in that economy. On the upside, the US labour market could remain tighter for longer, resulting in higher consumption growth.
13. Upward adjustments in market rates and time deposits have slowed, consistent with the MPC’s pause in interest rate increases. The DTI sector continued to make small changes to rates on saving deposits and new mortgage loans. Further, the weighted average loan rate increased marginally in December 2023. The flow of new loans to the private sector increased in real terms by 17.0 per cent at December 2023 relative to December 2022, notwithstanding a tightening in credit terms, as indicated by DTIs in Bank of Jamaica’s Quarterly Credit Conditions Survey. Local currency deposits grew by 14.1 per cent at December 2023, an acceleration relative to 13.2 per cent in April 2023 at the start of the fiscal year, but was generally in line with estimated growth in nominal GDP for the December 2023 quarter.
14. The domestic banking system remains sound, with adequate capital and liquidity.
15. The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
16. The MPC noted that future monetary policy decisions will depend on incoming data related to the strength of the potential risks to inflation noted above. The Committee will maintain heightened surveillance of the risks to the inflation outlook, and remains committed to the Bank utilising the full set of tools to support the policy decisions and to take the necessary actions, including further interest rate increases, if the upside risks to inflation materialise.

_____________________

Chairman of the MPC
20 February 2024