Monetary Policy Discussion and Decision
At its meetings on 16 and 19 December 2022, the Monetary Policy Committee (MPC) noted the following:
- Jamaica’s inflation rate at November 2022 of 10.3 per cent was within the range of 9.5 to 10.5 per cent expected by Bank of Jamaica (BOJ).
- Core inflation (which excludes food and fuel prices) declined to 8.8 per cent at November 2022 from 9.0 per cent at October 2022.
- The key external drivers of headline inflation, such as grains, fuel and shipping prices, continued to trend downward and broadly in line with the Bank’s expectations.
- Inflation expectations continued to fall.
- As expected, the pace of monetary tightening by the United States (US) Federal Reserve Board (Fed) appeared to be slowing.
- The level of liquidity in the financial system remained consistent with the Bank’s objective of facilitating a reduction in inflation.
- Interest rates in the money and capital markets have generally increased in line with the policy rate.
- Some deposit-taking institutions (DTIs) have recently adjusted their deposit and lending rates marginally and have announced future rate increases. The MPC anticipates more material increases in deposit and lending rates in early 2023.
In the context of the incoming data and consistent with its November 2022 announcement, the MPC unanimously decided to maintain the policy interest rate (the rate offered to DTIs on overnight placements with BOJ) at 7.00 per cent, effective 21 December 2022. The MPC also agreed to continue containing Jamaican dollar liquidity expansion and maintaining relative stability in the foreign exchange market.
Bank of Jamaica’s 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. The MPC noted that, between October 2021 and October 2022, the weighted average deposit rate offered by commercial banks to the public increased by 49 basis points (bps). Average prime loan rates increased by 156 bps relative to end-September 2021. While growth in local currency deposits decelerated to 9.4 per cent at October 2022, compared to growth of 12.9 per cent a year earlier, growth in loans and advances at October 2022 accelerated to 11.7 per cent from 7.7 per cent a year earlier.
The MPC noted that in the absence of new shocks, its future monetary policy decisions depend on the continued pass-through effect of its past policy rate changes on deposit and loan rates in the ensuing months. The decisions also depend on the MPC seeing more pass-through of international commodity price reductions to domestic prices and on the Fed not exceeding its stated policy rate increases.
The MPC also reiterated its continued commitment to pursuing initiatives to address structural impediments to the monetary transmission mechanism.
The following considerations also helped to inform the MPC’s decisions:
- Inflation has generally tracked in line with the Bank’s expectations. The annual point-to-point inflation rate at November 2022 of 10.3 per cent, although higher than the October 2022 outturn of 9.9 per cent, was within the range of 9.5 to 10.5 per cent expected by the Bank (see chart below). The inflation rate at November primarily reflected upward movements in the Food and Non-Alcoholic Beverages, Alcoholic Beverages and Restaurants and Accommodations Services, as well as the Furnishings, Household Equipment and Routine Household Maintenance divisions of the Consumer Price Index. The increase in Food and Non-Alcoholic Beverages was largely attributable to higher prices for vegetables, tubers, plantains, cooking bananas and pulses following adverse weather conditions in the September 2022 quarter. The increase in Restaurants and Accommodations Services primarily reflected the lagged impact of international commodity prices. In this context, core inflation at November 2022 (measured as inflation less fuel and food prices (CPI-FF)) of 8.8 per cent was lower than the October 2022 outturn.
- The indicators suggest that inflation over the next 3 to 6 months will be broadly consistent with the Bank’s most recent inflation forecast. International fertilizer prices fell by an average monthly rate of 8.7 per cent for October to November 2022, which should support lower agricultural prices. The Bank also expects that agricultural prices will fall in early 2023 as a result of higher production from replanting. Average daily West Texas Intermediate (WTI) crude oil and Liquified Natural Gas (LNG) prices trended below the Bank’s forecast for October and November 2022, with the former increasing by an average monthly rate of 0.2 per cent, relative to the Bank’s projections for an average increase of 5.0 per cent. LNG prices fell by 7.9 per cent for the period compared to a projected decline of 2.0 per cent. Average grains prices (wheat, corn, soybean) also fell faster than expected for the two-month period, reflecting an average monthly decline of 0.2 per cent compared to a projected increase of 0.4 per cent.
- Expected inflation 12-months ahead declined to 11.6 per cent at the October 2022 survey, relative to 11.7 per cent at the previous survey. Survey respondents indicated that changes in the external price of imported goods were the most important factor influencing inflation expectations. Inflation expectations should continue to fall as import prices fall and domestic monetary policy actions take effect.
- The Jamaican economy continued to perform creditably, and the likelihood that gross domestic product (GDP) for the fiscal year 2022/23 will grow by 3.0 to 4.5 per cent remains high. GDP grew by an estimated 3.5 to 4.5 per cent for the September 2022 quarter, driven by continued strong growth in Tourism and its allied services and Manufacturing, Installation and Agriculture. For the December 2022 quarter, a 2.5 to 3.5 per cent growth is anticipated. However, against the background of the continued growth in the economy, labour shortages in selected sectors carry the potential for future wage adjustments, which can put upward pressure on inflation.
- GDP growth in the US for the December 2022 quarter is likely to be slightly higher than the Bank’s projection. However, the impact of higher inflation on consumption and tight monetary conditions may weigh on growth in 2023.
- Inflation in the US decelerated to 7.1 per cent at November 2022, which, while projected to remain elevated relative to the Fed’s target, is expected to continue to fall over time.
- On 15 December 2022, the Fed raised its interest rate target by 50 bps and signalled further rate increases. Bank of Jamaica anticipates that the Fed will raise interest rates at its February 2023 meeting by an additional 25 to 50 bps. Further, the US monetary policy authority could end its tightening cycle in the second half of 2023 if the incoming data remains favourable to the Fed’s inflation objective.
- The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
- The MPC will continue to closely monitor the global and domestic economic environments for potential risks that could threaten Jamaica’s inflation target.
Chairman of the MPC
20 December 2022