November 20, 2020
The Bank of Jamaica (BOJ) held its Quarterly Monetary Policy Press Conference on November 19, 2020. Where the Governor, Mr. Richard Byles, commented on the Bank’s decision to maintain the policy interest rate at 0.50% per annum.
According to the Governor, “This decision to hold the policy rate is based on our assessment that inflation will continue to trend within the Bank’s inflation target of 4.0% to 6.0% over the next two years, notwithstanding the impact on agricultural prices from the recent rains. The Bank has also maintained this highly accommodative monetary policy stance to support a speedy economic recovery once this crisis has passed and we will continue to monitor and assess our stance as new developments emerge.”
Bank of Jamaica’s next monetary policy decision announcement is scheduled for Friday, 18 December 2020.
Liquidity Support
Notably, Mr. Byles indicated that,” BOJ has also been proactive in preserving financial sector. We have provided J$76 billion (or about 4 of GDP) in Jamaica dollar liquidity support to the financial system through various initiatives. These included a special bond-buying programme, a reduction in the cash reserve requirement and special bond repurchase facilities.”
Other initiatives aimed at providing liquidity to and ensuring the continued smooth functioning of the foreign exchange market. Were the introduction of FX swap arrangements, B-FXITT intervention sales, direct sale of FX to major players in the energy sector, reduction of the foreign currency cash reserve requirement and provision of a US dollar bond repurchase facility. Markedly, the liquidity provided to the system via these sources have exceeded US$1.0 billion since March 2020 and is equivalent to more than 11% of GDP.
Inflation Review
Bank’s recent track record of guiding inflation within the 4 – 6% corridor. During the past 36 months leading up to October 2020, inflation has surpassed the upper limit of the 4 %– 6% target on only two occasions which reflects a success rate of 94%. According to Mr. Byles, “The reason for inflation exceeding target on those two occasions was largely related to temporary increases in agricultural prices because of droughts or floods and these prices retreated after those events, pulling inflation down with it”
Conversely, there have been 13 occasions over the past 36 months when inflation fell below the 4% lower bound of the target. Which were also attributed to volatility in agricultural prices and declines in international oil prices, which in turn influenced reductions in electricity and transport-related costs.
Inflation Outlook
According to the Statistical Institute of Jamaica (STATIN) the current inflation rate for the 12 months leading up to October 2020, is 5.0%, which was firmly within the Bank’s inflation target range. Core inflation (which excludes increases in agriculture and fuel prices) for the 12 months leading up to October 2020 was 3.6%. Looking ahead, Mr. Byles stated, “We expect core inflation to remain relatively low given the weak demand conditions in Jamaica and anticipates that consumer prices will rise as follows over the next three quarters: December 2020 5.5 – 6.5%, March 2021 6.0 – 7.0% and June 2021 4.0 – 5.0%.”
The BOJ indicated that there are some risks that inflation could breach the upper end of the target range in both December 2020 and during the March 2021 quarter, an outlook that is higher than the Bank’s previous forecast shared in August 2020.
This outlook is primarily underpinned by:
- the impact of the recent heavy rains on agricultural supplies and prices, which is estimated to add approximately 1.0 percentage point to the inflation forecast for FY2020/21; and
- an assumption for increases in some regulated utility prices in the December 2020 and the March 2021 quarters which, if they occur, will contribute about 0.6 of a percentage point to inflation for the fiscal year.
Mr Byles sought to reassure businesses and individuals that expected agricultural price increases will not continue indefinitely and any breach of the inflation target will only be temporary. “Once we get through this blip, our forecast is for inflation to remain within target over the next two years.”
Impact of COVID on the broader economy
In STATIN’s latest release, domestic economic activity contracted significantly by 18.4% for the June 2020 quarter. Additionally, the most recent labour market data released in October indicated that approximately 12.6% of the labour force was unemployed at July 2020, up from 7.8% a year earlier. We expect that the worst is behind us with the June quarter contraction. Nonetheless, our latest projection for FY2020/21 is for real economic activity to contract in the range 10 – 12%, somewhat more than our previous projection of 7 – 10%.
The Bank projects a partial rebound of about 3% growth will commence in FY2021/22 and could possibly be as high as 8% if there is a strong recovery in tourism. However, the Jamaican economy is not expected to return to pre-COVID-19 levels before at least FY2022/23.
Despite the fallout in economic activity, the financial system has remained resilient throughout the pandemic. Deposit taking institutions’ (DTIs) balance sheets indicates that they are more than adequately capitalized and in compliance with prudent liquidity standards and loan quality for the system remains well below the threshold.
As it relates to external accounts the Bank expects that the current account deficit of the balance of payments will remain at sustainable levels 8 of 2 – 4% of GDP over the next two years. This is better than previously expected, supported by stronger than expected remittance inflows, a dramatic fall in imports as well as lower levels of private capital outflows. As such, Jamaica’s reserves remain healthy, with net international reserves at end-October amounting to approximately US$2.9 billion.
Recent developments in the foreign exchange market
The Governor highlighted that, “The exchange rate appreciated for most of September and has depreciated moderately since October. The annual average rate of depreciation at the end of October 2020 was 6.7%, which, although above the average depreciation of 2.6% recorded last year, is arguably moderate under the circumstances.”
Additionally, “It would be normal for the exchange rate in a tourism dependent economy like ours to depreciate more rapidly in a crisis like this but, quite remarkably, supply has virtually kept pace with demand. Between March and October, daily purchases of foreign currency by authorised dealers and cambios from end users averaged US$30.4 million, slightly lower than the average of US$33.4 million recorded last year. Shortfalls in the market have been met by BOJ B-FXITT sales of US$242.3 million since the onset of the crisis in March 2020.”
The Governor concluded, “The Bank will maintain its accommodative posture in an effort to limit the adverse impact of these shocks on the Jamaican economy and to support a sustainable economic recovery. BOJ will focus on maintaining inflation within the target range of 4 – 6% and stands ready to deploy additional measures, where appropriate, to ensure the continued smooth flow of liquidity in the financial system.”
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