January 28, 2022
The International Monetary Fund (IMF) says “further tightening” of monetary policy may be needed if the Bank of Jamaica (BOJ) is to bring inflation down from its eight-year high.
A worsening surge in consumer prices which was led chiefly by higher prices for food and transport pushed inflation to 8.5 percent in October 2021, leaving families facing the steepest rise in the cost of living since 2013.
The IMF in its latest Article IV Consultation forecasted that even after a 100-basis points uptick in its policy rate on October 1 to 1.50 percent, “further tightening may be needed, to firmly anchor inflation expectations, underline the central bank’s commitment to its inflation goal, and bring inflation to within the target range by end-2023”.
The report did not mention the central bank’s 0.5 percent increase in its policy rate in November. That increase took the benchmark rate to 2.0 percent, its highest level since 2018.
“Even if the current shocks are transitory and longer-term inflation expectations have not been affected (which is hard to gauge as no survey of inflation expectations beyond 12 months exists), further rises in inflation that are not accompanied by a monetary policy response could de-anchor the expectations and jeopardize the inflation’s return to the BOJ target range,” the fund said in the report.
The notes suggest the IMF is clearly in support of future rate hikes to control runaway price increases. Unfortunately, it said, “there are significant risks that inflation may be higher”. The BOJ said it expects prices to rise in the range of eight to nine percent in the next 10 to 12 months.
However, despite the IMF prodding the BOJ to prepare to tighten policy further in case inflation gets out of control, Opposition spokesman on Finance Julian Robinson is not seeing eye-to-eye with the policy. Robinson said, “raising interest rates will not have the desired impact of reducing inflation”, citing months-old commentary, both locally and overseas, that higher consumer prices are being driven by international supply chain constraints which will soon abate. He said the BOJ’s action will result in higher-cost loans which “will be a devastating blow for manufacturers and producers” and could hit an economy “struggling to return to pre-pandemic levels”.
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