Monetary Policy Discussion and
Decision May 2022
At its meetings on 12, 13 and 18 May 2022, the Monetary Policy Committee (MPC) noted that inflation at April 2022 of 11.8 per cent was higher than the outturn at March 2022 and represented the ninth consecutive month that inflation has been above the Bank’s target range of 4.0 to 6.0 per cent. While inflation is forecasted to rise further over the next two months, the Bank forecasts inflation to fall in the second half of the year, consistent with consensus forecast for a fall in commodity prices. This means that the public should start to see lower inflation rates each month, beginning in the second half of 2022, as long as tensions between Russia and Ukraine do not escalate and inflation among Jamaica’s trading partners falls. Global consensus forecasts also suggest that US inflation peaked in March 2022.
To continue limiting the pass-through of higher international commodity prices and facilitate a return of inflation to the target range in the shortest possible time period, the majority of the MPC agreed to further increase the policy rate by 50 basis points (bps) to 5.00 per cent. The Committee also agreed to continue other measures to contain Jamaican dollar liquidity expansion and to maintain stability in the foreign exchange market. The Committee also noted that the Bank’s strong international reserves reinforces its ability to support the foreign exchange market as needed.
The MPC noted that its current decisions reflect a cumulative increase in the policy rate of 450 bps since October 2021, which has taken the policy rate close to the level that the Committee considers appropriate. Since October 2021 to date, the Bank sold approximately US$552 million to the foreign exchange market, more than twice the amount sold for the corresponding period last year. In addition, the Bank adjusted the Net Open Position limits for deposit-taking institutions (DTIs). These policy actions contributed to the maintenance of stability in the foreign exchange market and led DTIs to commence adjusting interest rates on deposits and loans. The MPC noted that its policy decisions were being made in a period of high uncertainty and that future decisions will be subject to incoming data materializing as expected.
The measures 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 also expected to reduce the demand for foreign currency, leading to a relatively more stable exchange rate. The measures are also expected to cause demand in the economy to fall and, consequently, limit the ability of businesses to pass on price increases to consumers.
The following considerations informed the Committee’s decisions:
- Inflation is projected to peak in the range of 12.0 per cent to 15.0 per cent by June 2022 and to fall within the target range by the June 2023 quarter. STATIN announced that the annual point-to-point inflation rate at April 2022 was 11.8 per cent, higher than the rate at March 2022.While inflation is forecasted to rise further over the next two months, the Bank forecasts inflation to fall in the second half of the year, consistent with consensus forecast for a fall in international commodity prices. In this context, inflation is projected to average 8.0 to 9.0 per cent over the next two years, which is higher when compared to the average inflation rate of 6.6 per cent over the past two years.
- The inflation forecast for the next two years anticipates that the public’s expectation for future inflation will begin to fall in the second half of 2022, also consistent with the projections for a decline in international grains and energy prices during that period. The Bank’s projected decline in oil and grains prices is broadly consistent with recent consensus forecasts.
- The risks to this inflation forecast are skewed to the upside (which means that actual inflation could be higher than the forecast). The factors that could cause the inflation rate to be higher than forecasted include a worsening in supply chain disruptions, higher than anticipated pass-through of imported inflation to domestic inflation and even higher commodity prices, should the Russia-Ukraine conflict deteriorate. The rebound of the economy and the demand that this brings for labour may contribute to upward movements in wages and hence further upward movement in prices. On the downside, weaker than expected global growth could negatively impact domestic demand.
- Business expectations of inflation have increased further. In the March 2022 survey, respondents indicated that they expect inflation over the next 12 months to be 12.1 per cent, above the previous survey of 9.8 per cent. While this expectation is above the Bank’s forecast, they should fall in the second half of the year as oil and grains prices decline.
- Domestic economic activity is projected to continue recovering from the COVID-19 pandemic and 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 2.0 to 4.0 per cent from the range of 7.0 to 10.0 per cent in FY2021/22. This is broadly similar to the Bank’s previous projection. Growth will continue to be driven by the services industry (particularly tourism). The forecast also assumes that production at one of Jamaica’s main alumina plants, which had been temporarily closed, will resume operations by June 2022.
- The risks to the domestic GDP forecast are skewed to the downside (which means that GDP growth could be lower than the forecast). Growth in tourist arrivals and related activities could be lower than projected, given the possibility of a 5th wave of the COVID-19 virus and the impact of efforts to control it. External demand could also be lower than anticipated due to surging COVID-19 infections and the Russia/Ukraine conflict. More severe weather in the context of climate change also poses a downside risk to GDP growth. Finally, there is a risk that domestic consumption could be adversely affected by the acceleration in domestic inflation.
- The forecast for US GDP growth over the next two years has been revised downwards. The growth outlook for the US economy is based on the impact of high inflation on consumption, tighter monetary conditions and reduced fiscal support. Inflation in the US was 8.3 per cent at April 2022, lower than the outturn of 8.5 per cent at March 2022 but above the Fed’s target of 2.0 per cent. The Bank projects that inflation in the US is near its peak and will fall. The Fed increased the policy rate by 50 bps in May 2022, a cumulative increase of 75 bps since it began its tightening cycle in March 2022, and indicated that additional rate hikes would be forthcoming. Bank of Jamaica anticipates that the Fed will raise interest rates in all of its remaining five meetings for 2022.
- The risks to the outlook for the US economy are skewed to the downside, primarily related to the possibility of escalating geopolitical tensions and the imposition of more sanctions, which could lead to new trade disruptions and worsened global supply shortages. Additional downward pressures could come from the possibility of further COVID-19 outbreaks as well as the unanticipated impact of the tightening in monetary policy in that country.
- The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
The MPC will continue to closely monitor the economic environment and will make its future policy decisions on the basis of incoming data.
Chairman of the MPC
19 May 2022