Bank of Jamaica’s Monetary Policy Committee (“MPC/the Committee”) sets monetary policy to meet the inflation target of 4.0 per cent – 6.0 per cent, as outlined by the Minister of Finance in April 2021. At its first meeting held on 14 and 17 May 2021, the Committee judged that the existing stance of monetary policy remains appropriate. The MPC unanimously voted to maintain the policy rate, i.e. the interest rate on current account balances held by deposit taking institutions at Bank of Jamaica, at 0.5 per cerit. The decision was based on the following considerations:
Inflation is projected to average 4.8 per cent over the next two years. The inflation forecast anticipates that commodity (oil and grains) price inflation will accelerate, which will affect domestic transport and processed food inflation. While commodity prices are expected to remain elevated, further significant increases are not expected. Further, inflation is expected to be tempered by relatively lower domestic agricultural food price inflation based on expectations of favourable weather conditions. A resumption in domestic GDP growth and some imported inflation are projected to support moderately higher core inflation over the forecast period. The outlook for core inflation also contemplates the effects of one-off adjustments in selected regulated prices.
The annual inflation rate at March 2021 was 5.2 per cent, below the February 2021 MPA projection of 5.7 per cent but marginally above the mid-point of the Bank’s target range.
The risks to the inflation forecast are skewed to the upside. Upside risks include a stronger than anticipated impact of international commodity price increases on domestic prices and inflation expectations. The risks to the commodity price forecast are however balanced. In contrast, there is a risk that agricultural inflation in the June 2021and September 2021quarters could be lower than anticipated.
GDP growth for FY2021/22 is projected within a range of 5.0 per cent to 8.0 per cent and is expected to moderate within a range of 3.0 per cent to 5.0 per cent for FY2022/23. Economic activity is expected to improve over the near term, relative to the previous forecast, due to the impact of strong improvements in the economies of Jamaica’s major source markets, which should have a positive impact on the services industries in Jamaica.
The risks to the domestic GDP forecast are balanced. Growth in tourist arrivals and related activities could rebound faster than currently projected, given the fast pace of vaccination in Jamaica’s main source markets and the pent-up demand that exists. The key downside risk relates to the domestic spread of the Covid-19 virus and the efforts to control it. If Jamaica’s stringency measures are enhanced and protracted, retrenchment in travel and disruptions in the production and distribution of goods could occur.
Global growth has been revised upwards, primarily reflecting stronger economic activity in the United States as vaccines are distributed earlier than anticipated and as the associated restrictions on activities ease. The release of pent-up demand from these developments will support higher growth. Further, growth in the US may be supported by additional fiscal stimuli. The forecast for energy and grains prices have been revised upwards given the improvement in the global economy.
The domestic fiscal policy stance does not pose any risks to inflation over the near term.
The MPC will continue to closely monitor the economic environment and will take whatever action is necessary to achieve its objective. The Committee intends to maintain this accommodative policy stance until there is evidence that the economy has returned to its pre-COVID levels provided that there are no threats to inflation breaching the upper bound of the inflation target.
Chairman of the MPC
18 May 2021