Monetary Policy Discussion and Decision
At its meetings on 16 and 17 November 2022, the Monetary Policy Committee (MPC) noted that Jamaica’s inflation rate at October 2022 of 9.9 per cent was higher than the outturn at September 2022 of 9.3 per cent. While the key external drivers of headline inflation, such as grains and shipping prices, continued to trend downwards, the Bank has not yet seen the full pass-through to domestic food prices. Further, core inflation (which excludes food and fuel prices) increased marginally to 9.0 per cent at October 2022 from 8.9 per cent at September 2022. There is some risk that core inflation will remain high for a protracted period if inflation expectations, second-round effects from the commodity price shocks and labour market pressures do not moderate.
The MPC further noted that monetary tightening among Jamaica’s main trading partners continued at a fast pace. On 2 November 2022, the Federal Reserve Board (Fed) raised its interest rate target by 75 basis points (bps) and signalled further rate increases. This policy stance could cause capital outflows from Jamaica and a faster pace of exchange rate depreciation if domestic monetary policy is not aligned correctly.
Therefore, to further mitigate these risks and to facilitate a return of inflation to the target range in the shortest possible time, the MPC unanimously agreed to increase the policy interest rate by 50 bps to 7.00 per cent. The current decision has resulted in a cumulative increase in the policy rate since October 2021 of 650 bps.
The MPC also agreed to continue containing Jamaican dollar liquidity expansion and maintaining relative stability in the foreign exchange market. Since October 2021, while maintaining a flexible exchange rate, the Bank has taken strong actions in the foreign exchange market, including selling foreign exchange when necessary. Without these actions, imported inflation and hence the final prices faced by consumers would have been higher. The Committee noted that the Bank’s strong international reserves reinforces its ability to support the foreign exchange market, as needed.
Overall, the policy signals are expected to cause interest rates on deposits and loans to rise further, making savings in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive. They are consequently expected to help reduce the demand for foreign currency, underpinning a more stable exchange rate and lower inflation. The measures are also intended to constrain aggregate demand and, consequently, limit the ability of businesses to pass on price increases to consumers. The MPC however noted that while there have been some movements in commercial banks’ deposit and loan rates, it anticipated further increases in these rates in response to the Bank’s policy signals.
After twelve months into its tightening cycle, the MPC therefore judges that it is appropriate to pause further policy rate increases and to watch its pass-through effects on deposit and loan rates. This pause is also conditional on the MPC seeing more pass-through of international commodity price reductions to domestic prices and on the Fed not exceeding their targeted rate increase for 2022 and 2023.
The MPC reiterated its commitment to continue pursuing initiatives to address structural impediments to the monetary transmission mechanism. The MPC will continue to identify and closely monitor global and domestic risks that threaten Jamaica’s inflation target.
The following considerations helped to inform the Committee’s decisions:
- Consistent with global consensus forecasts for a fall in commodity prices and the Bank’s overall monetary policy stance, and absent any new shocks, inflation is projected to decelerate in 2023. Still, inflation will continue to breach the upper limit of the Bank’s target range over the next 10 to 12 months. This forecast envisages that annual inflation will fluctuate between 9.5 per cent and 10.5 per cent between November and December 2022 and fall within the target range by the December 2023 quarter. The forecast assumes that the public’s expectation for future inflation will continue to fall.
- The near-term risks to the inflation forecast are assessed to be balanced, which means that actual inflation could be in line with the projection. The factors that could cause higher inflation include further supply chain disruptions and a spike in oil prices. On the downside, weaker than expected global growth could negatively impact domestic demand and imported inflation.
- The Jamaican economy continues to perform creditably. There are signs that the economy continued to expand for the September 2022 quarter and for the December 2022 quarter to date. In this context, the unemployment rate at July 2022 of 6.6 per cent was lower by 1.9 percentage points when compared to the corresponding quarter of 2021.
- Domestic economic activity is projected to return to pre-COVID-19 levels by early 2023. In this context, GDP growth for FY2022/23 is projected to moderate to the range of 2.5 to 4.5 per cent from the growth of 8.2 per cent in FY2021/22. This is broadly similar to the Bank’s previous projection. GDP growth is projected to be driven by the services industry, particularly tourism, which has been recovering at a rapid pace. There has also been some buoyancy in the agricultural sector, which is expected to continue as the tourism sector recovers and weather conditions improve. Further, the forecasted growth reflects the resumption of production at the Jamalco alumina plant. GDP growth for FY2023/24 is projected to moderate as income growth among Jamaica’s main trading partners normalise to pre-Covid rates.
- The risks to the domestic GDP forecast are skewed to the downside, meaning GDP growth could be lower than the forecast. Growth in tourist arrivals and related activities could be adversely affected by headwinds to global growth. These headwinds include a deepening of geopolitical tensions and the continuation of synchronised tightening of financial conditions in Jamaica’s main trading partners. Finally, there is a risk that domestic consumer spending could be adversely affected by the high, albeit falling, domestic inflation.
- The forecast for US GDP growth over the next two years has been revised downwards. This revised growth outlook reflects the impact of high inflation on consumption, tighter monetary conditions and reduced fiscal support. Inflation in the US was 7.7 per cent at October 2022, lower than the outturn of 8.2 per cent at September 2022 but above the Fed’s target of 2.0 per cent. Bank of Jamaica anticipates that the Fed will raise interest rates in December 2022 by an additional 50 bps and could end its tightening cycle in early 2023, if the incoming data remains favourable to inflation.
- The risks to the outlook for the US economy are skewed to the downside, primarily related to the possibility of escalating geopolitical tensions, which could lead to further trade disruptions and supply shortages. Additional downward pressures could come from a stronger than expected impact of monetary tightening on economic growth.
- The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
Chairman of the MPC
18 November 2022