August 29, 2019
The Bank of Jamaica (BOJ) held its Quarterly Monetary Policy Press Conference today, where the new Governor, Mr. Richard Byles, commented on the Bank’s decision to lower the policy interest rate by 25 basis points to 0.50% effective August 28, 2019.
According to the Governor, “Bank of Jamaica’s decision to cut rates further reflects our assessment that, in the absence of additional monetary policy action, inflation is expected to fall below the lower limit of inflation target of 4% to 6% at various points over the next eight quarters. In addition, notwithstanding the recent uptick in annual inflation, core (or underlying) inflation is projected to remain at relatively low levels. In the period that follows the next eight quarters, headline inflation is forecasted to gradually approach the midpoint of the target, although at a slower pace than we had expected at the last assessment in May 2019.”
The decision to maintain the Bank of Jamaica’s medium-term inflation target of 4% to 6% is based on Jamaica’s current and prospective economic circumstances, which is consistent with the Bank’s objectives of GDP growth and debt reduction. The evaluation of a lower inflation target would result in a more conservative and restrictive monetary policy, which will have an adverse effect on fiscal accounts and deceleration of economic expansion and job creation.
Consequently, increasing the pace of private sector credit expansion will lead to increased economic activity, which will be stimulated by businesses and households. An increased economic activity will therefore, support inflation returning to the centre of the target more quickly.
The decision to further reduce the policy rate as at August 28, 2019 follows a series of rate reductions by the Bank between June 2017 and June 2019, of which 300 basis points reduction was noted during the period. This resulted in the acceleration of private sector credit expansion in recent months, which the Governor indicated that, “Credit extended by DTIs to private sector businesses and households grew by 16.8% over the 12 months to June 2019, which was above the 12.3% growth experienced a year earlier at June 2018. While this faster pace of private sector credit growth is a positive signal, we are of the view that this expansion in credit is still not fast enough, particularly in the context where domestic activity remains below the economy’s potential or capacity. This suggests that an even faster pace of credit growth is possible without causing inflation to rise above the inflation target.”
Factors that inform inflation outlook:
- Low, improving domestic demand
- Slower growth by main trading partners
- Declines in crude oil prices
- Impact of energy diversification
The projected inflation for the eight quarters ahead is based on the effect of continued low domestic demand conditions in relation to the economy’s capacity and the expectation of slow growth among Jamaica’s trading partners and declines in international commodity prices. In addition, Jamaica’s electricity generation by Jamaica Public Service favours liquefied natural gas (LNG) in the December 2019 quarter, which is expected to result in lower electricity rates.
Three to five years ahead, inflation is expected to slowly increase towards the midpoint of the target. However, there are risks associated with the forecast path as constant heightened volatility in domestic agricultural food prices, breaches the lower limit of the target.
Risks to the Forecast
The Bank assessed the risks to the inflation forecast to be generally balanced over the next two years but however outlined the downside and upside risk that would cause inflation to deviate from projections.
The main downside risk that would result in inflation being lower than forecasted includes:
- More than anticipated agriculture production
- Lower than projected exports and domestic demand, given that global trade tensions escalate
The main upside risk that would result in inflation being higher than forecasted are as follows:
- Lower than projected impact of fuel diversification on cost of electricity
Nonetheless, Mr. Byles indicated that the prospects for the Jamaican economy are positive, while noting the headwinds arising from the global economy. “Domestic economic activity continues to show signs of recovery, although at a slower pace than earlier observed. The near-term outlook is for real GDP to expand at an average quarterly rate of 1% to 2%, which is below the previous projection for a quarterly expansion of 1.5% to 2.5%. Consequently, we expect that the output gap, that is Jamaica’s GDP growth relative to the economy’s capacity, will be wider than previously expected, suggesting that inflationary pressures will largely remain contained over the next eight quarters.”
Furthermore, as mentioned by the Bank, “notwithstanding the expectation for a slower pace of GDP growth, labour market conditions continue to improve. Jamaica’s unemployment rate fell to a record low of 7.8% in April 2019, down from 9.8% a year earlier. We expect to see further improvements in labour market conditions over the next two years with more jobs anticipated in Tourism, Manufacturing, Finance & Insurance and Business Process Outsourcing.”
In concluding, Mr. Byles ended on the note that, “Bank of Jamaica’s view is that the prospects for the Jamaican economy remains positive, even though headwinds are on the horizon. Foreign reserves are at adequate levels and we have a sustainable position in the current account of the balance of payments. The fiscal performance is strong and public sector debt continues to decline at a steady pace. Market interest rates remain generally low. However, the domestic economy continues to operate below its potential. In this context, we believe that there is room to accommodate a faster pace growth in the economic activity without compromising the inflation target”.