Summary of Monetary Policy Discussion and Decision August 2023

Summary of
Monetary Policy Discussion and Decisions
August 2023

At its meetings on 16 and 17 August 2023, the Monetary Policy Committee (MPC) noted the following:

1. Core inflation (which excludes food and fuel prices from the Consumer Price Index (CPI)) at July 2023 of 5.2 per cent was lower than the 8.4 per cent recorded at April 2022. Correspondingly, Jamaica’s annual headline inflation rate at July 2023 of 6.6 per cent was much lower than the peak rate of 11.8 per cent recorded at April 2022.
2. However, the headline inflation rate at July 2023 was slightly higher than the 6.3 per cent outturn at June 2023. While the key drivers of headline inflation, such as grains prices, shipping costs and inflation expectations, continued to decline, there was exceptionally high agricultural price inflation in June and July 2023, which reflected the impact of prevailing high temperatures. In addition, there have been ongoing upward adjustments in the price of meals consumed away from home, and the first-round effect of the adjustment in the national minimum wage was recorded in the June 2023 CPI.
3. The business sector’s expectation for inflation 12-months ahead declined to 8.3 per cent at May 2023 from 9.6 per cent at April 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. The uptick in inflation over the past three months is projected to continue for the remainder of the September 2023 quarter, driven by higher agricultural prices, higher education costs and wage pressures. Inflation is, however, expected to generally decelerate to the Bank’s target range of 4.0 to 6.0 per cent by the December 2023 quarter and with the exception of a a few months in 2024, remain there. The forecast assumes that international grains prices will increase in the September 2023 quarter, consequent on a rise in geopolitical tensions. Overall, fuel prices are also projected to increase over the next two years while grains prices are projected to decline. The forecast also assumes that inflation expectations will fall further as import prices remain well below peak levels and as past domestic monetary policy actions continue to restrain inflation.
5. Inflation could, however, rise above this forecasted path. Higher-than-projected future wage adjustments in the context of the tight domestic labour market, second-round effects from the agricultural price inflation, a worsening in supply chain conditions and an elevation of world oil prices could put further upward pressure on inflation. Downside risks to this outlook include weaker-than-expected global growth, which could reduce domestic demand, and the non-materialisation of some projected increases to regulated prices.

Against the background of material success in controlling core inflation, aided by the Bank’s management of the exchange rate and liquidity, 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:

1. The Jamaican economy continues to expand, which supports increases in aggregate demand for goods and services. Gross domestic product (GDP) for the June 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 September 2023 quarter. The notable decline in the unemployment rate as at April 2023 to 4.5 per cent, supported by anecdotal information about wage adjustments in selected private sector industries, indicates that the domestic labour market is very tight.
2. 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 adversely affected by the larger-than-expected impact of domestic inflation.
3. US GDP growth is forecasted to slow in 2023 relative to 2022. This growth outlook reflects the impact of high, albeit decelerating, inflation on consumption, tight monetary conditions and reduced fiscal support. Inflation in the US was 3.0 per cent at June 2023, lower than the outturn of 5.0 per cent at March 2023. US inflation is projected to continue to fall but remain above the Fed’s target of 2.0 per cent for the remainder of 2023 and 2024. 
4. As anticipated, the Fed increased rates by 25 basis points (bps) in July 2023, following a pause in its monetary tightening in June 2023. 
5. The risks to the outlook for the US economy are balanced. Lower growth could emanate from escalating geopolitical tensions, increased supply shortages and a stronger-than-expected impact of contractionary monetary policy and the tightening of credit conditions on economic growth. However, an increase in consumption spending could support higher GDP growth.
6. 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). However, the upward adjustment in these rates has slowed, consistent with the MPC’s pause in interest rates. The DTI sector also continued to make small changes to their rates on saving deposits and new mortgage loans but the weighted average loan rate declined marginally in May 2023. The flow of new loans to the private sector declined in real terms by 6.2 per cent over the year to May 2023 and, as indicated by DTIs in Bank of Jamaica’s Quarterly Credit Conditions Survey, generally reflecting the impact of higher interest rates and tightened credit terms. Local currency deposits grew by 14.0 per cent at May 2023, an acceleration relative to 13.2 per cent in April 2023 and above the estimated growth in nominal GDP for the June 2023 quarter. In addition, in the context of the stability in the foreign exchange market, deposit dollarisation continued to trend downward.
7. The domestic banking system remains sound with adequate capital and liquidity.
8. The domestic fiscal policy stance continues to pose no risk to inflation over the near term.

The MPC noted that future monetary policy decisions will depend on the incoming data related to the indicators of the above-noted potential headwinds to inflation. The Bank will continue to closely monitor the global and domestic economic environments for potential risks to Jamaica’s inflation rate and act accordingly.

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Chairman of the MPC
18 August 2023