Bank of Jamaica Quarterly Monetary Policy Report – May 2021

May 27, 2021

The Bank of Jamaica (BOJ) held its Quarterly Monetary Policy Press Conference on May 19, 2021. Where the Governor, Mr. Richard Byles, commented on the Bank of Jamaica’s entrance into a new paradigm of central banking in Jamaica with the implementation on 16 April 2021 of the Bank of Jamaica (Amendment) Act, 2020. This means the Bank now has the authority, among other things, to make monetary policy decisions towards the attainment of the government’s inflation target without any external influence. Additionally, Monetary policy decisions will no longer be solely determined by the Governor of the Bank. They are now determined by a new five-member statutory committee called the Monetary Policy Committee (MPC).

According to the Governor, “The Central Bank decided to maintain the policy interest rate at 0.50% per annum. This decision was based on the Monetary Policy Committee’s (MPC) assessment that inflation will continue to trend within the Bank’s inflation target of 4.0 per cent to 6.0 per cent over the next two years. The MPC has maintained this highly accommodative monetary policy stance to support a speedy economic recovery and will continue to hold this posture, provided that there are no threats to inflation breaching the upper bound of the inflation target.”

Bank of Jamaica’s next monetary policy decision announcement is scheduled for Wednesday, 20 June 2021.

Inflation Review

According to the Statistical Institute of Jamaica, the inflation rate for the 12 months leading up to April 2021 was 3.8 per cent, just below the lower end of the Bank’s inflation target and lower than the 5.2 per cent recorded for March 2021. The deceleration in inflation was mainly related to a reduction in electricity rates. According to Mr. Byles, “As required under the Bank of Jamaica Act, the Bank will provide a report to the Minister of Finance within the next 60 days explaining, among other things, the reasons for the inflation target for April being missed.” Core inflation (which excludes increases in agriculture and fuel prices) for the 12 months leading up to April 2021 was, however, 5.5 per cent up from 5.3 per cent in March mainly attributed to a rise in processed food inflation.

Inflation Outlook

Over the past 40 months leading up to April 2021, inflation has been below 6.0 per cent on 38 occasions or 95 per cent of the time. The Governor recounted, “the main reason for inflation going above the target on the two occasions was temporary increases in agricultural prices due to either droughts or floods. On the flip side, inflation fell below the lower end of the target on 15 occasions over the period, again mainly due to volatility in agricultural prices as well as declines in international oil prices.”

Looking ahead the MPC anticipates that annualized consumer price inflation will evolve as follows over the next three quarters:

June 2021 3.5 – 4.5 per cent

September 2021 4.5 – 5.5 per cent

December 2021 3.5 – 4.5 per cent

The MPC’s forecast is for inflation to remain within the target range of 4 to 6 per cent. Inflation is projected to average 4.8 per cent over the next two years, a forecast that anticipates that commodity (oil and grains) price inflation will not rise much beyond current levels. The committee anticipates that this will directly affect domestic transport and processed food inflation. In contrast, inflation is expected to be tempered by subdued domestic agricultural food price inflation. A resumption of 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.

Outlook for the Jamaican Economy

The most recent real GDP data published by STATIN indicated that domestic economic activity contracted by 8.3 per cent for the December 2020 quarter. This represents a 0.9 per cent growth relative to the September quarter and represents another in a series of improvements.

The latest data released by STATIN indicated an unemployment rate of 8.9 per cent at January 2021, up by 1.5 percentage points compared to that recorded a year earlier. Notwithstanding is an improvement relative to the 10.7 per cent recorded at October 2020. When account is taken of the seasonal patterns in employment, these statistics suggest that more than 25 thousand jobs were restored between October 2020 and January 2021, following the approximately to 40 thousand jobs that were added between July and October last year.

According to Mr. Byles “while the GDP outturn for the December 2020 quarter has shown some improvement, the Bank continues to project that, for the full 2020/21 fiscal year, real GDP will contract in the range 10 per cent to 12 per cent. We then expect a partial rebound of at least 5 per cent in economic activity to commence in FY2021/22, and could possibly be as high as 8 per cent, if there is a strong recovery in tourism and tourism-related activities.”

Furthermore, “It is likely that growth could trend towards the top-end of this forecast range, given the higher than anticipated pace of inoculations, the anticipated release of pent up vacation demand from this development and the impact of the significant fiscal and monetary stimuli in Jamaica’s major trading partner. The key downside risk to this growth projection relates to the domestic spread of the COVID-19 virus and the efforts to control it. If Jamaica’s stringency measures have to be enhanced and protracted, retrenchment in travel and disruptions in the production and distribution of goods could occur.”

Deposit-taking institutions’ (DTIs) balance sheets continue to indicate that they are growing, properly capitalized and in compliance with prudent liquidity standards. Notwithstanding the moderating impact of the pandemic, loan growth for DTIs has remained fairly resilient, even though the pace of loan growth has slowed. The stock of private sector loans and advances recorded year-on-year growth of 8.8 per cent at March 2021, compared to growth of 15.8 per cent a year earlier.

Recent developments in the foreign exchange market

The Governor highlighted that, “At 17 May 2021, the exchange rate was J$150.68 to US$1, representing a depreciation of 5.6 per cent for the calendar year to date. This pace of change is below the depreciation of 11.2 per cent recorded over the same period of last year and is consistent with the usual seasonal pattern of flows in the market.” Additionally, “It is noteworthy that confidence in the market-driven foreign exchange system is such that, even in a period of economic uncertainty, flows remain strong and any business or individuals in Jamaica that needs FX, can access it. For the calendar year to end-April 2021, daily purchases of US dollars by authorised dealers and cambios from end users averaged US$35.0 million, higher than the average of US$28.9 million recorded over the same period last year. Similarly, daily sales to end users averaged US$28.2 million since the start of 2021, above the average of US$25.2 million a year earlier.”

Since March 2020, the Bank has purchased US$1.9 billion from the market via market surrenders which pays GOJ debt servicing and some energy imports. The Bank has also continued to intervene in the market when temporary shortfalls have been identified. Total B-FXITT flash sale operations since the onset of the crisis in March 2020 to date has amounted to US$411.0 million. At end April 2021, Jamaica’s net international reserves remain healthy, amounting to US$3.3 billion.

Over the next two years, the Bank projects that the current account deficit of the balance of payments will remain at sustainable levels of about 3 – 5 per cent of GDP. This is supported by expectations for a partial recovery in tourism arrivals, driven in large part by successful phased vaccination programmes in key source markets and our assumption of careful control of community spread in Jamaica.

The Governor concluded, “Bank of Jamaica, through its newly formed Monetary Policy Committee, will continue to play its role in facilitating a sustainable economic recovery by maintaining its accommodative posture while remaining focussed on ensuring that inflation remains low, stable and predictable within the target range of 4.0 per cent to 6.0 per cent. The Bank will also deploy additional measures, as needed, to ensure the continued stability of the financial system.”



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