Summary of Monetary Policy Discussion and Decision – June 2023

Summary of
Monetary Policy Discussion and Decision
June 2023

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

1. 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.
2. In keeping with expectations, the key external drivers of headline inflation such as grains, fuel and shipping prices continued to decline and inflation expectations trended downward.
3. 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.
4. 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.
5. 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.
6. The MPC continues to see a relatively strong, lagged pass-through of its policy rate to interest rates in the domestic money and capital markets and the term rates offered on deposits by deposit-taking institutions (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 mortgage rates. 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. These developments will contribute to further downward pressure on inflation. 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. In addition, in the context of the stability in the foreign exchange market, deposit dollarisation continued to trend downward.
7. The domestic banking system remains sound with adequate capital and liquidity.
8. Growth in the monetary aggregates has been mixed. Local currency deposits grew by 13.2 per cent at April 2023, a slight deceleration relative to 13.6 per cent in March 2023 but above the estimated growth in nominal GDP for the June 2023 quarter. Growth in loans and advances at March 2023 also decelerated to 10.6 per cent from 11.5 per cent at March 2023.

Therefore, to ensure that the inflation rate continues to trend towards the target range, the MPC unanimously agreed to maintain: (i) the policy interest rate at 7.0 per cent, (ii) tight Jamaican dollar liquidity conditions and (iii) relative stability in the foreign exchange market.

The following considerations also informed the MPC’s decisions:

1. The May 2023 inflation outturn (see chart below) 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.

2. 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.
3. Selected indicators support this outlook. International fertiliser prices fell by an average monthly rate of 0.6 per cent for April and May 2023. The average of daily West Texas Intermediate (WTI) crude oil and Liquified Natural Gas (LNG) prices trended below the Bank’s forecast for April and May 2023, with the latter declining by an average monthly rate of 2.1 per cent, relative to the Bank’s projections for an increase. Similarly, WTI prices declined by an average monthly rate of 0.8 per cent for the period compared to the Bank’s projection for an increase. Average grains prices (wheat, corn, soybean) declined at a faster pace than expected for the two-month period.
4. The business sector’s expectation for inflation 12-months ahead increased slightly to 9.6 per cent at April 2023 from 9.3 per cent at March 2023, but was lower than the 12.8 per cent that obtained at April 2022. Survey respondents indicated that changes in the external price of imported goods continued to constitute the most important factor influencing inflation expectations for April 2023. Inflation expectations are projected to continue to fall as import prices decline further and as past domestic monetary policy actions continue to restrain inflation.
5. 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.
6. The risks to the domestic GDP forecast are skewed to the downside, which means that actual GDP growth could be lower than the forecast.Growth in tourist arrivals and related activities could be adversely affected by headwinds to global growth. There is also a risk that domestic consumer spending could be adversely affected by domestic inflation.
7. GDP growth in the US for the June 2023 quarter is likely to be higher than recent projection but is likely to be weak.
8. Inflation in the US decelerated to 4.0 per cent at May 2023 and, while projected to remain elevated relative to the Fed’s target, is expected to continue to fall over time.
9. On 14 June 2023, the Fed held its interest rate target at a range of 5.00 – 5.25 per cent and signalled that some further rate increases in 2023 may be appropriate to bring inflation down to 2.0 per cent over time.
10. The risks to the outlook for the US economy are balanced. Lower growth could emanate from escalating geopolitical tensions, increased supply shortages and a stronger-than-expected impact of monetary policy tightening and the tightening of credit conditions (in the context of recent adverse developments in the US banking system) on economic growth. However, growth employment and consumption spending could support higher growth.
11. The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
12. The MPC noted that future monetary policy decisions will depend on the incoming data. The MPC will also continue to closely monitor the global and domestic economic environments for potential risks to Jamaica’s inflation rate.

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Chairman of the MPC

29 June 2023