Summary of Decisions – November 2023

Summary of
Monetary Policy Discussion and Decisions
November 2023

At its meetings on 17 and 20 November 2023, the Monetary Policy Committee (MPC) noted the following:

1. Headline inflation at October 2023 fell within the Bank’s target range of 4.0 to 6.0 per cent for the second consecutive month. Jamaica’s annual inflation rate at October 2023 of 5.1 per cent was below the 5.9 per cent at September 2023, the outturns for the previous four months, and also much lower than the peak rate of 11.8 per cent recorded at April 2022. This October outturn was expected and reflects the third time since April 2023 that inflation fell within the target band. Core inflation (which excludes food and fuel prices from the Consumer Price Index (CPI)) was 5.7 per cent at October 2023, generally in line with the average for the past two months and, lower than the 8.4 per cent recorded at April 2022.
2. The key drivers of headline inflation, such as grains prices, shipping costs and inflation expectations, continued to decline, and the exchange rate has remained generally stable, given strong tourism and remittance inflows. However, international oil prices have trended higher than the Bank’s forecast, mainly due to the impact of geopolitical tensions and production cuts by major oil producers. Furthermore, while moderating, high domestic agricultural price inflation at October reflected the impact of previous drought conditions on agricultural supplies.
3. The business sector’s expectation for inflation 12-months ahead declined to 8.0 per cent in September 2023 from 8.8 per cent at the previous survey in July 2023, and its peak of 12.8 per cent at April 2022. Survey respondents indicated that changes in the external price of imported goods continued to be the most important factor influencing inflation expectations.
4. Inflation is projected to rise above the Bank’s target range between the December 2023 and March 2025 quarters. The projected acceleration in inflation primarily reflects the impact of the announced increases in selected public passenger vehicle (PPV) fares in October 2023 and April 2024. The forecast also assumes that oil prices will be elevated over the next three quarters (December 2023 to June 2024). International grains prices are, however, projected to continue to fall in a context of buoyant supplies, while shipping prices are forecasted to remain low and stable, given the projected slowdown in global growth.
5. The risks to the inflation outlook are skewed to the downside, which means that inflation could track below projection. The main downside risks include the possibility of fiscal measures being implemented to cushion the impact of the increase in PPV fares, which was signalled by the Government. Oil prices could also trend below the forecast. Upside risks to this outlook include higher-than-projected future wage adjustments in the context of the tight domestic labour market, second-round effects from the PPV fare increases, sharp increases in domestic agricultural price inflation over the near term, and worsening supply chain conditions.
6. Against the background of these developments, 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:

7. The Jamaican economy continues to expand, which supports increases in aggregate demand for goods and services. Despite the impact of drought conditions on the agriculture sector, gross domestic product (GDP) for the September 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 December 2023 quarter. The notable decline in the unemployment rate as at July 2023 to 4.5 per cent, 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 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 negatively affected by the larger-than-forecasted impact of domestic inflation.
9. US GDP growth is likely to be higher than forecasted. While growth in 2023 is now projected to be higher relative to 2022, growth is projected to slow in 2024. This is generally consistent with consensus forecast.This outlook reflects the impact of high, albeit decelerating, inflation on consumption, tight monetary conditions and reduced fiscal support. Inflation in the US was 3.2 per cent at October 2023, a decline relative to the September 2023 outturn. US inflation is projected to continue its general fall as the economy slows but remain above the Fed’s target of 2.0 per cent for the remainder of 2023 and 2024. 
10. As anticipated, the Fed continued to maintain its monetary policy target for interest rates at 5.25 – 5.50 per cent in November 2023, following an increase in July 2023. The Fed also suggested that future monetary policy decisions will continue to be data dependent.
11. The outturns for selected external indicators have been mixed. The increase in the average of daily West Texas Intermediate (WTI) crude oil and Liquified Natural Gas (LNG) prices for September and October 2023 was higher than the Bank’s forecast. LNG prices increased by an average monthly rate of 9.4 per cent over the two-month period, amid increased demand. Similarly, WTI prices increased by 2.8 per cent for the same period, mainly reflecting concerns about a further disruption to global supply. International fertiliser prices increased by an average monthly rate of 0.8 per cent over the period while, in contrast, average grains prices (wheat, corn, soybean) declined for the period.
12. The risks to the outlook for the US economy are balanced. Lower growth could emanate from escalating geopolitical tensions, increased supply shortages, a stronger-than-projected impact of contractionary monetary policy, and the tightening of credit conditions on economic growth. However, higher-than-projected increases in consumption spending could support higher GDP growth.
13. 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). The upward adjustment in market rates and time deposits has slowed, consistent with the MPC’s pause in interest rate increases. The DTI sector also continued to make small changes to rates on saving deposits and new mortgage loans. Further, the weighted average loan rate increased marginally in September 2023. The flow of new loans to the private sector increased in real terms by 2.2 per cent over the year to September 2023 and, as indicated by DTIs in Bank of Jamaica’s Quarterly Credit Conditions Survey, the marginal increase generally reflected the impact of higher interest rates and tightened credit terms. Local currency deposits grew by 14.3 per cent at September 2023, an acceleration relative to 13.2 per cent in April 2023 at the start of the fiscal year, and was above the estimated growth in nominal GDP for the September 2023 quarter. In addition, deposit dollarisation continued to trend downward, showing an increasing preference to hold Jamaican dollars.
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 decided to maintain heightened surveillance of the risks to the inflation outlook, and is committed to the Bank using the full set of tools at its disposal to support the policy decisions and to take the necessary actions, including further tightening of monetary policy, if the emerging upside risks to inflation materialise. 

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Chairman of the MPC
21 November 2023