Summary of Monetary Policy Discussion and Decision – 18 February 2022

Summary of
Monetary Policy Discussion and Decision
February 2022

Bank of Jamaica’s Monetary Policy Committee (“MPC/the Committee”) sets monetary policy to meet the inflation target of 4.0 per cent – 6.0 per cent, as outlined by the Minister of Finance in April 2021.

At its meetings on 16 and 17 February 2022, the MPC noted the following:

1. Inflation has accelerated and is significantly above target. Inflation at January 2022 of 9.7 per cent remained above the upper limit of the Bank’s target range and this breach is projected to persist over the next 10 to 12 months.

2. While international commodity and shipping prices had declined in the early half of the December 2021 quarter, there have been some reversals and the impact of past increases has had a stronger than projected pass-through to local prices. The ongoing shock to international commodity prices has also contributed to a further rise in inflation expectations.

3. The prospects of earlier and stronger monetary tightening among Jamaica’s major trading partners may precipitate capital outflows and pressures on the exchange rate, if domestic monetary policy is not appropriately aligned.

4. Underlying demand pressures may also begin to threaten the stability of the foreign exchange market and, with it, diminishing the prospects of inflation returning to the target range.

5. In the wake of past monetary policy adjustments, while interest rates in the money markets have increased at a faster pace than the policy rate, banks remained relatively liquid and, for the most part, have not passed on the policy rate increases to their customers who hold deposits with them.  In this context, banks have also only marginally increased loan rates.

In light of the above, stronger actions, including those relating to Jamaican dollar liquidity management and the foreign exchange (FX) market, are warranted. Therefore, in order to continue limiting the second-round effects and to guide inflation back within the target range over the next two years, the MPC unanimously agreed to further increase the Bank’s policy rate by 150 bps to 4.00 per cent. This decision does not entirely reverse the Bank’s accommodative monetary policy stance. The Committee also decided to pursue stronger measures to contain Jamaican dollar liquidity expansion and to maintain stability in the FX market. Finally, consistent with meeting its inflation target sustainably in the medium term, the MPC agreed to consider maintaining or expanding its suite of policy measures at subsequent policy meetings. This position is subject to inflation, inflation expectations and other macroeconomic data evolving as projected.

The following considerations informed the Committee’s decisions:

1. Without further policy action, inflation is projected to average 6.0 per cent to 7.0 per cent over the next two years, which is higher when compared to the average inflation rate of 5.5 per cent over the past two years. Inflation will continue to breach the upper limit of the Bank’s target range over the next 8 to 10 months and is projected to peak in the range 9.0 per cent to 11.0 per cent over this period.

2. The inflation forecast for the next two years assumes the continued lagged impact of higher international commodity and shipping prices, continued recovery in domestic demand and seasonal agricultural price changes, the influence of which will be partly offset by some moderation in inflation expectations. The recovery in domestic demand is forecasted to be driven mainly by external demand.

3. There remains some uncertainty around the inflation forecast but the risks to the forecast are assessed to be balanced (which means that actual inflation should track in line with the forecast). The factors that could cause the inflation rate to be higher than forecasted include a higher than anticipated pass-through of imported inflation to domestic inflation and heightened inflation expectations. On the downside, weaker global growth from the possibility of geopolitical tensions as well as stronger than expected and more persistent supply constraints could impact domestic economic activity and consequently demand.

4. Business expectations of inflation remain elevated and have increased further. In the latest survey in December 2021, respondents indicated that they expect inflation over the ensuing twelve months to be 9.8 per cent, significantly above the Bank’s inflation target as well as the previous survey of 8.9 per cent. This increase in expectations runs counter to the Bank’s objective of returning inflation to the target range by the second half of 2022. Indicative yields on Government of Jamaica (GOJ) long-term, domestic currency bonds also increased during the December 2021 quarter in the context of an upward shift in expectations.

5. GDP growth for FY2021/22 is projected within the range of 7.0 per cent to 10.0 per cent and is forecasted to moderate within a range of 2.0 per cent to 4.0 per cent for FY2022/23. This is broadly similar to the Bank’s previous projection.Domesticeconomic activity is projected to reflect the impact of continued growth in the economies of Jamaica’s major trading partners. In this context, growth will continue to be driven by the services industry (particularly tourism), notwithstanding setbacks from the Omicron variant of the coronavirus. The GDP forecast also assumes that the temporary disruption to production at one of Jamaica’s main alumina plants will be resolved by June 2022.

6. The risks to the domestic GDP forecast are skewed to the downside. Growth in tourist arrivals and related activities could be lower than currently projected, given the emergence of new variants of the coronavirus and the impact of efforts to control it.Further, constraints posed by the shortage of key raw materials and the impact of higher inflation on real incomes could have an adverse impact on GDP growth. More severe weather in the context of climate change also poses a downside risk to GDP growth.

7. The forecast for US GDP growth and inflation over the 8-quarter horizon has been revised upwards. The prospects for the US economyover the next yearare however constrained bytheshortage of key production inputs. Inflation in the US was 7.5 per cent at January 2022, above the target of 2.0 per cent, and is projected to remain elevated for some time. Monetary conditions in the US are consequently projected to tighten by March 2022 as the Federal Reserve has signalled that it will end its asset purchases and commence the upward adjustment of its target for interest rates.

8. The risks to the outlook for the US economy are skewed to the downside, primarily related to the possibility of new waves of coronavirus infections and efforts to contain them. Persistently high inflation could also dampen consumption. There are also risks to the outlook for monetary conditions in the US as the Federal Reserve adjust interest rates at a faster than anticipated pace.

9. The domestic fiscal policy stance continues to pose no risk to inflation over the near term.

The MPC has once again written to the Honourable Minister of Finance & the Public Service explaining the causes of the breach, the measures that have been taken by the Bank to restore inflation to the target range and the short-term outlook for inflation.

The MPC will continue to closely monitor the economic environment and is prepared to take further action at its next meeting to achieve its objective.

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Chairman of the MPC

18 February 2022