Monetary Policy Discussion and Decision
At its meetings on 27 and 28 September 2022, the Monetary Policy Committee (MPC) noted that, while the key drivers of inflation and other economic indicators are trending in the right direction, conditions have not sufficiently solidified to ensure that inflation is sustainably on a downward path.
The MPC also noted the slow pace at which interest rates on local currency deposits and loans have responded to the Bank’s policy signals. In a context where the Bank’s policy rate increased by 500 basis points (bps) between end-September 2021 and end-July 2022, the weighted average deposit rate offered by deposit-taking institutions (DTIs) to the public increased by only 37 bps.
The MPC noted that the pace of monetary tightening among Jamaica’s main trading partners has accelerated. On 21 September 2022, the Federal Reserve Board (Fed) raised its interest rate by 75 bps, 25 bps higher than anticipated by the Bank. The Fed also changed its forward guidance to signal that interest rates could rise to 4.4 per cent by end-2022 and to 4.6 per cent by end-2023 compared to its previous median projections of 3.4 per cent and 3.8 per cent, respectively. This more aggressive stance could result in US dollar assets becoming more attractive relative to those denominated in Jamaican dollars, which could cause capital outflows, prompting a faster pace of exchange rate depreciation and, consequently, a derailment of the Bank’s efforts to manage inflation.
Therefore, to mitigate these risks and to facilitate a return of inflation to the target range in the shortest possible time, the MPC unanimously agreed to further increase the policy rate (the rate offered to deposit-taking institutions on overnight placements with BOJ) by 50 bps to 6.50 per cent per annum, effective 30 September 2022. The MPC also decided to continue pursuing other measures to contain the Jamaican dollar liquidity expansion and to maintain relative stability in the foreign exchange market. Further, to ensure that individual depositors are encouraged to continue to save Jamaican dollars, the MPC also agreed to consider additional measures to support upward movements in DTIs’ deposit rates.
The MPC noted that its current decision has resulted in a cumulative increase in the policy rate of 600 bps since October 2021. These interest rate adjustments, in conjunction with the Bank’s decisive actions in the foreign exchange market over the period to date, have contributed to maintaining stability in the foreign exchange market. These decisive actions include adjusting the Net Open Position limits for deposit-taking institutions and selling foreign exchange to the market when necessary. Without these actions, imported inflation and hence the final prices faced by Jamaican consumers would have been higher. At 27 September 2022, Jamaica’s gross reserves amounted to US$4.3 billion, representing approximately 125.6 per cent of the projected IMF’s Assessing Reserve Adequacy (ARA) measure for FY2022/23. The MPC also considered the following incoming data in arriving at its decision:
- The annual point-to-point inflation rate at August 2022 of 10.2 per cent was similar to the July 2022 outturn (see chart below). The outturn primarily reflected upward movements in the Food and Non-Alcoholic Beverages, Transport and Restaurants and Accommodations Services index. The increase in Food and Non-Alcoholic Beverages was largely attributable to higher prices for Cereal and cereal products as well as Meat and Other Animals Parts, reflecting the lagged impact of international commodity prices on these items. However, core inflation at August 2022 (measured as inflation less fuel and food prices (CPI-FF)) of 8.3 per cent was marginally higher than the July 2022 outturn.
- Other indicators suggest that inflation for the next two years will be broadly consistent with the Bank’s most recent inflation forecast. While agricultural prices remain volatile, there are indications that prices could benefit from lower fertilizer costs. However, adverse weather and increased demand over the December 2022 quarter may adversely impact agricultural prices. Average daily crude oil prices fell by 8.3 per cent in August 2022, below the Bank’s forecast but liquefied natural gas (LNG) prices increased by 23.3 per cent for the month. This latter uptick was in contrast to a decline of 16.0 per cent anticipated by the Bank. Average grains prices (wheat, corn, soybean) fell faster than expected for August 2022 but there are indications that the price of sugar on the world market may rise over the short term. The Bank expects that commodity prices (oil and grains) will continue to fall, consistent with global consensus forecasts.
- The Jamaican economy continues to perform creditably and the likelihood that GDP for FY2022/23 will grow by 2.5 to 4.5 per cent remains high. GDP grew by an estimated 5.0 to 6.0 per cent for the June 2022 quarter, driven by continued strong growth in Tourism and its allied services, as well as higher agricultural production. For the September 2022 quarter, growth of 2.5 to 3.5 per cent is anticipated, which continues to signal a healthy rebound in economic activity. Against the background of the continued growth in the economy and existing labour shortages, labour market pressures carry the potential for future wage adjustments to exceed those required for the consolidation of low, stable and predictable inflation.
- GDP growth in the United States (US) for the September 2022 quarter is likely to be broadly in line with the Bank’s projection but is likely to be lower than projected for 2022. This view is based on the impact of higher-than-expected inflation on consumption and tighter monetary conditions. Inflation in the US decelerated to 8.3 per cent at August 2022; while it is projected to remain elevated relative to the Fed’s target, it is expected to fall over time.
- The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
The MPC will closely monitor the global and domestic economic environment and is prepared to act as necessary to ensure a downward track for inflation.
Chairman of the MPC
29 September 2022