Monetary Policy Discussion and Decision
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 meetings on 11 and 12 November 2021, the MPC noted that, at 8.2 per cent at September 2021, inflation remains above the upper limit of the Bank’s target range. The MPC has written to the Honourable Minister of Finance & the Public Service to explain 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 outlook for inflation. Large increases in international commodity and shipping prices have been the principal contributor to domestic inflation rising above the target range. In addition, there were significant upward price impetuses from a shock to agricultural prices and one-off increases in regulated transportation and energy prices.
To limit the second-round effects of the shocks and to guide inflation back within the target range over the next two years, the MPC unanimously decided to further reduce the level of monetary policy accommodation by increasing the policy rate by 50 bps to 2.00 per cent. The Committee also decided to maintain other measures to contain Jamaican dollar liquidity expansion and reiterated that, while not targeting any specific level of the exchange rate, Bank of Jamaica will continue to ensure that movements in the exchange rate do not threaten the inflation target. Finally, consistent with meeting its inflation target sustainably in the medium term, the MPC agreed to consider further increases in the Bank’s policy rate (and by extension raising real interest rates, which are currently significantly negative) and maintain or intensify the accompanying measures at subsequent policy meetings. This position is subject to inflation expectations, other macroeconomic data and, consequently, the inflation outlook evolving as projected.
This reduction in the level of monetary accommodation will cause market-based interest rates to rise further, which will make the returns on Jamaican dollar assets more attractive relative to foreign currency assets. It will also make saving in Jamaican dollars more attractive and borrowing in Jamaican dollars more expensive. These effects are intended to temper the demand for foreign currency and hence moderate the pace of depreciation in the exchange rate and, generally, reduce demand in the economy and with it the ability of businesses to pass on price increases to consumers.
The following considerations informed the Committee’s decisions:
- Inflation is projected to average 5.5 per cent to 6.5 per cent over the next two years, which is higher when compared to the average inflation rate of 5.0 per cent over the past two years. Inflation will continue to breach the upper limit of the Bank’s target range over the next 10 to 12 months at higher rates than were envisaged in the previous forecast and is projected to peak in the range 8.0 per cent to 9.0 per cent over this period.
- The inflation forecast for the next two years anticipates a gradual rise in core inflation, supported by the lagged impact of higher international commodity and shipping prices and a recovery in domestic demand. The recovery in domestic demand is forecasted to be driven mainly by external demand and by still-accommodative monetary conditions. The outlook also assumes the continued transmission of higher international commodity and shipping prices, albeit lagged, to domestic processed food, food-related services and energy price inflation. Past agricultural food price increases and increases in regulated fares for Route Taxis, Rural Stage Carriage and Hackney Carriage and the electricity tariff, will support higher inflation for 11 months (October 2021 to August 2022).
- Business expectations of inflation, while elevated, have not increased significantly. In the latest survey in September 2021, respondents indicated that they expect inflation over the ensuing twelve months to be 7.4 per cent, significantly above the Bank’s inflation target but in line with the previous survey. Indicative yields on Government of Jamaica (GOJ) long term, domestic currency bonds increased during the September 2021 quarter but remained low in real terms. These signs of a stabilisation of expectations, although early, are encouraging.
- There remains some uncertainty around the inflation forecast and the risks to the forecast are assessed to be skewed to the upside (which means that inflation could track above the forecast). The factors that could cause the inflation rate to be higher than forecasted include continued shocks to domestic agriculture commodity supplies and a higher than anticipated pass through to domestic inflation of international commodity prices and shipping costs. There are also upside risks to inflation from higher than forecasted inflation expectations (which could impact price setting behaviour), further increases in regulated prices and higher than anticipated growth in the economy. On the downside, strong recovery in agricultural production could support lower food price inflation in the short-term.
- GDP growth for FY2021/22 is projected within the range of 7.0 per cent to 10.0 per cent and is forecasted to moderate within a range of 2.0 per cent to 4.0 per cent for FY2022/23. This is broadly similar to the Bank’s previous projection. Economic activity is projected to reflect the impact of continued growth in the economies of Jamaica’s major trading partners. In this context, growth continues to be driven by the services industry (particularly tourism). The GDP forecast has, however, been adversely impacted by a temporary disruption to production at one of Jamaica’s main alumina plants as well as adverse weather, which will affect growth in Mining & Quarrying and Agriculture, Forestry & Fishing. The impact of these shocks is offset by higher projected growth in Manufacture, Wholesale & Retail Trade and Transport, Storage & Communication.
- 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, the emergence of new variants, especially in source markets, and the impact of 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.
- The forecast for US GDP growth over the 8-quarter horizon has been revised upwards. While the prospects for the US economy over the next years constrained by the shortage of key production inputs, growth is projected to continue to rebound at a faster than projected pace as pent-up demand is released and new fiscal stimulus measures are implemented. Monetary conditions in the US are projected to tighten as the Federal Reserve has announced that it will reduce the pace of its asset purchases, beginning November 2021. The risks to the outlook for the US economy are skewed to the downside, primarily related to the possibility of new waves of coronavirus infections and efforts to contain them. Persistently high inflation could also dampen consumption. There are also risks to the outlook for monetary conditions in the US as the Federal Reserve may begin to raise interest rates earlier than anticipated. Inflation in the US was 6.2 per cent at October 2021, above the target of 2.0 per cent, and is projected to remain elevated for some time.
- The domestic fiscal policy stance continues to pose no risk to inflation over the near term.
The MPC will continue to closely monitor the economic environment and is prepared to take further action at the next MPC meeting to achieve its objective.
Chairman of the MPC
16 November 2021