Monetary Policy Discussion and Decision
At its meetings on 27 and 28 June 2022, the Monetary Policy Committee (MPC) noted that, while inflation at May 2022 of 10.9 per cent was lower than inflation at April 2022, core inflation remained elevated and headline inflation is likely to continue to breach the Bank’s target range over the next year.
The MPC also noted that US Federal Reserve (Fed) had signalled a faster pace of increase in interest rates in the US. Further, in the wake of the MPC’s continued monetary policy adjustments, interest rates on new bank deposits and loans in Jamaica have started to adjust upwards and there has been increased stability in the exchange rate relative to the recent past.
The MPC unanimously agreed to increase the policy rate by 50 bps to 5.50 per cent. The MPC also decided to continue pursuing other measures to contain Jamaican dollar liquidity expansion and maintain relative stability in the foreign exchange market.
The MPC noted that its current decision reflects a cumulative increase in the policy rate of 500 bps since October 2021, which has taken the policy rate closer to the level that the Committee considers appropriate. The Bank over this period also sold foreign exchange to the market, where necessary, including via the public sector enterprise facility, while continuing to ensure that the gross reserves remained comfortably above the level considered adequate. At 27 June 2022, Jamaica’s gross reserves amounted to US$4.4 billion, which represented approximately 129 per cent of the projected IMF’s Assessing Reserve Adequacy (ARA) measure for FY2022/23. In addition, the Bank increased its stock of certificates of deposit by J$35 billion over the period and adjusted the Net Open Position limits for deposit-taking institutions (DTIs).
The Bank’s current decisions will cause liquidity conditions to remain tight and interest rates on bank 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 measures are also aimed at reducing economic demand and, consequently, the ability of businesses to pass on price increases to consumers. These decisions are also expected to continue to support a relatively more stable foreign exchange market.
The following considerations informed the Committee’s decisions:
- The annual point-to-point inflation rate at May 2022 of 10.9 per cent was below the April 2022 outturn (see chart below). The deceleration in inflation at May, relative to April 2022, primarily reflected the temporary effects of lower inflation for agricultural commodities, particularly vegetables, due to an improvement in supplies. In addition, Housing, Water, Electricity, Gas and Other Fuelsfell, largely due to the Government of Jamaica’s subsidy on electricity bills for customers who use 200 kilowatts per hour or less. Notwithstanding these favourable developments, the annual point-to-point core inflation rate at May 2022 (measured as inflation less fuel and food prices (CPI-FF)) of 9.7 per cent was slightly above the Bank’s forecast and higher than the April 2022 outturn.
- While headline inflation at June 2022 may fall below the peak range of 12.0 per cent to 15.0 per cent indicated in the forecast, the incoming data do not suggest that the Bank’s most recent inflation forecast for the next two years is likely to be changed. The Government’s electricity subsidy will help temper inflation for May to August 2022, relative to the forecast. While agricultural prices remain volatile, there are indications that the supply of vegetables and tubers to the domestic market in June and July 2022 will be adequate and their prices may continue to fall, if weather conditions remain favourable. While grains and crude oil prices have generally trended in line with the forecast, liquefied natural gas (LNG) prices have evolved higher than anticipated. The Bank, however, continues to expect that, consistent with global consensus forecasts, commodity prices (oil and grains) will fall in the second half of the year and that local inflation will average 8.0 to 9.0 per cent over the next two years, as long as tensions between Russia and Ukraine do not escalate and inflation among Jamaica’s trading partners falls.
- Business expectations of inflation have increased further. In the April 2022 survey, respondents indicated that they expect inflation over the next 12 months to be 12.8 per cent, above the previous survey of 12.1 per cent. The MPC still believes expectations will moderate in the second half of the year as international commodity prices decline, consistent with the consensus forecast.
- There is also a likelihood that domestic GDP growth may be higher than expected for the June 2022 quarter. This stance is supported by continued strong growth in Tourism and its allied services as well as higher agricultural production. This updated view of GDP growth for the June 2022 quarter does not disturb the Bank’s forecast for FY2022/23 that GDP growth will fall within the range of 2.0 to 4.0 per cent.
- GDP growth in the United States (US) for the June 2022 quarter is likely to be broadly in line with the Bank’s projection but is likely to be lower than projected for the entire year. This view is based on the impact of higher than expected inflation on consumption and tighter monetary conditions. Inflation in the US accelerated to 8.6 per cent at May 2022 and, while it is projected to remain elevated relative to the Fed’s target, is expected to fall over time.
- To contain inflation, the Fed increased the policy rate by 75 bps in June 2022, 25 bps greater than anticipated. This adjustment brought the cumulative increase in the Fed’s policy rate to 150 bps since it began its tightening cycle in March 2022. In addition, the Fed suggested that a further increase of 175 bps is possible for the remainder of 2022, 75 bps above the Bank’s previous assessment. For 2023, the Fed is anticipating a further increase of 50 bps. In this context, on net, the expected increase in the Fed’s policy rate for 2022 and 2023 is 50 bps above the Bank’s previous assessment.
- The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
The MPC has once again written to the Honourable Minister of Finance & the Public Service explaining the causes of the breach, the measures that have been taken by the Bank to restore inflation to the target range and the short-term inflation outlook.
The MPC will continue to closely monitor the economic environment in this period of high uncertainty and will make its future policy decisions based on incoming data.
Chairman of the MPC
29 June 2022