Summary of Monetary Policy Discussion and Decision May 2023

Summary of
Monetary Policy Discussion and Decision
May 2023

At its meetings on 17 and 18 May 2023, the Monetary Policy Committee (MPC) noted the following:

1. Inflation continued to ease, consistent with Bank of Jamaica’s monetary policy stance and international developments. Jamaica’s headline inflation rate at April 2023 of 5.8 per cent was marginally below the Bank’s expectations and represented a return to the target range for the first time since July 2021. Core inflation (which excludes food and fuel prices from the Consumer Price Index) at April 2023 of 5.7 per cent was well below the outturn of 8.4 per cent at April 2022.
2. The key external drivers of headline inflation such as grains, fuel and shipping prices, continued to decline, broadly in line with the Bank’s expectations. In addition, inflation expectations continued to track downward. As anticipated, the pace of monetary tightening by the United States (US) Federal Reserve Board (Fed) has slowed, and recent developments suggest that interest rates in the US are at or near their peak.
3. Interest rates in the domestic money and capital markets and the term rates offered on deposits by deposit-taking institutions (DTIs) have generally increased in line with the policy rate, and the DTI sector continued to make small adjustments to rates on saving deposits and loans. Respondents to Bank of Jamaica’s Quarterly Credit Conditions Survey also indicated that credit terms were expected to tighten further for the June 2023 and September 2023 quarters. The flow of new loans to the private sector has also declined appreciably in real terms over the six months to March 2023 by 6.5 per cent and generally reflects the impact of higher interest rates and the tightening in credit conditions. The MPC was of the view that the maintenance of tight liquidity in the financial system and the preservation of relative stability in the foreign exchange market have had a significant impact on limiting the pass-through of imported inflation to inflation in the Jamaican economy. In addition, in the context of the stability in the foreign exchange market, deposit dollarisation continued to trend downward.
4. Growth in the monetary aggregates has been mixed. Local currency deposits grew by 13.6 per cent at March 2023, an acceleration in the growth rate relative to 9.6 per cent in February 2023 but below the estimated growth in nominal GDP for the March 2023 quarter.  Growth in loans and advances at March 2023 slightly decelerated to 11.1 per cent from 11.5 per cent at February 2023.
5. The domestic banking system remains sound with adequate capital and liquidity.
6. There are likely to be temporary upticks in inflation above the target range during the June and September 2023 quarter, affected by recent increases in the cost of communication services, the national minimum wage, seasonally higher agricultural prices as well as pending increases in other regulated prices such as transport costs. Annual inflation is projected to again be within the Bank’s inflation target range of 4.0 to 6.0 per cent by the December 2023 quarter.

The MPC noted that recent developments were generally positive and the risks to the inflation outlook were balanced. Higher-than-projected future wage adjustments, a stronger-than-anticipated impact of climate change on domestic agricultural prices and a worsening in supply chain conditions could put upward pressure on inflation. Further, higher-than-projected interest rates among major developed economies could worsen the interest differential, increase the pace of depreciation in the exchange rate and cause higher inflation. Among the factors that could lead to lower-than-projected inflation, weaker-than-expected global growth could negatively affect domestic demand, and some projected adjustments to regulated prices may not materialise.

Therefore, to continue underpinning inflation returning to the target range and to underwrite continued stability in the foreign exchange market, the MPC unanimously agreed to continue to hold the policy interest rate at 7.0 per cent, to maintain tight Jamaican dollar liquidity in the money market and to foster relative stability in the foreign exchange market.

The MPC noted that future monetary policy decisions to maintain inflation within the Bank’s target range will depend on the incoming data. The MPC also expressed its commitment to the continued review of the monetary transmission mechanism to ensure that monetary policy achieves the desired impact on inflation. 

The following considerations also informed the MPC’s decisions:

1. Consistent with global consensus forecasts for a further fall in certain commodity prices, the Bank’s overall monetary policy stance and in the absence of new shocks, inflation is projected to again continue to decelerate to the Bank’s inflation target range of 4.0 to 6.0 per cent by the December 2023 quarter.

2. The business sector’s expectation for inflation 12-months ahead declined to 9.3 per cent at March 2023 from 11.5 per cent at January 2023. Survey respondents indicated that changes in the external price of imported goods constituted the most important factor influencing inflation expectations. Inflation expectations are projected to continue to fall as import prices decline further and as past domestic monetary policy actions continue to affect the economy.
3. The Jamaican economy continues to grow strongly. Gross domestic product (GDP) for fiscal year 2022/23 is estimated in the range 4.0 to 5.5 per cent, in line with the range previously anticipated by the Bank.  There are signs that the economy continued to expand for the June 2023 quarter and GDP growth for FY2023/24 is projected to moderate between 1.0 to 3.0 per cent.
4. 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 domestic inflation.
5. US GDP growth is forecasted to slow down 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 4.9 per cent at April 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. 
6. The risks to the outlook for the US economy are skewed to the downside, primarily related to the possibility of escalating geopolitical tensions and increased supply shortages. Additional downward pressures could come from a stronger-than-expected impact of monetary tightening on economic growth and recent adverse developments in the banking system.
7. The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
8. The MPC will continue to closely monitor the global and domestic economic environments for potential risks to Jamaica’s inflation rate.

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Chairman of the MPC

19 May 2023