November 19, 2021
Impact of policy action on the Economy
An increase in policy rate/increase in market-based interest rates will make JMD Assets more attractive (which implies more saving and will make borrowing more expensive). Increased interest rates will temper demand and moderate the pace of depreciation. Reduced demand in the economy will impact the ability of businesses to pass price increases to consumers.
STATIN reported inflation in October accelerated to 8.5%, representing a third successive breach of the Bank’s target.
MPC’s decision designed to limit second-round effects of recent shocks
Some of the most recent shocks which have caused domestic inflation to rise above the target range include:
- Large increases in international commodity and shipping prices
- Significant upward price impetuses from a sharp increase to agricultural prices
- One-off increases in regulated transportation and energy prices
Outlook for inflation
Over the next 10 months, BOJ expects the peak to range between 8.0% to 9.0%. Inflation forecast reflects the continued impact of higher international commodity and shipping prices on domestic processed food, services and energy price inflation. With the tightening of monetary policy, BOJ anticipates that headline inflation will return to the target range in the latter part of 2022.
Risks to the Inflation Forecast
Key upside risks:
- Higher than anticipated pass-through to domestic prices
- Continued shocks to the supply of agricultural foods
- Higher than projected inflation expectations
- Further increases in regulated prices
- Higher than expected GDP growth
Key downside risk:
- Strong recovery in agricultural production
Developments in the FX market
The exchange rate was J$156.79 to US$1 on November 17, 2021, representing a 6.1% yearly point-to-point depreciation, which was similar to the depreciation for the same period last year. The BOJ stated that the exchange rate is fairly valued at its current levels, and the prospects for a stable market are good.
The BOJ also stated that foreign currency flows remain strong with daily FX purchases and sales for the calendar year to date exceeding those of the previous year. For the calendar year ending in October, BOJ sold US$675.4 million to the market. Furthermore, Jamaica’s international reserves, which total US$4.7 billion, remain strong.
Looking forward, over the next two years, BOJ expects the Current Account Deficit (CAD) to range between 1% to 3% of GDP, which reflects expectations for a recovery in tourist arrivals and spending.
The BOJ’s net open position (NOP) regime cap is to be restored effective 06 December 2021, the cap will be as follows:
- $4.5 billion limit for long positions
- $7.0 billion limit for short positions
The Bank commits to continue reviewing these limits annually and to amending them if deemed necessary.
Real GDP growth for FY2021/22 is to remain as anticipated, that is, projected GDP Growth for FY2021/22 is expected to be in the recovery range if 7.0% to 10.0% while for FY2022/23 projected GDP Growth is expected to be in the range of 2.0% to 4.0%. The key driver of rebound is the Tourism sector and related sectors. However, the real GDP has been adversely impacted by temporary disruption to production at Jamalco as well as adverse weather conditions. Moreover, BOJ anticipates higher growth in the manufacturing, distribution and the transport, storage & communication sectors.
Risks to the Growth Forecast
The key upside risk is a stronger rebound in tourism and related sectors. However, the key downside risk is the efforts to control the spread of the COVID-19 virus could result in a slowdown in travel and disruptions in production and distribution.
BOJ noted that the financial system remains robust and adequately capitalized. The pace of Private Sector Loans & Advances Growth has slowed down but remains positive. However, BOJ highlighted that “Loan quality for the system continues to remain well below our threshold for concern.”
Outlook for the Jamaican economy
Bank of Jamaica committed to fulfilling its mandate by:
- Ensuring Growth-enabling Macroeconomic Environment with Inflation within Bank’s Target of 4% to 6%.
- Reduced monetary accommodation aimed at influencing a return of inflation to our target in the shortest time possible.
Disclaimer:
Analyst Certification -The views expressed in this research report accurately reflect the personal views of Mayberry Investments Limited Research Department about those issuer(s) or securities as at the date of this report. Each research analyst (s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this research report.
Company Disclosure -The information contained herein has been obtained from sources believed to be reliable, however its accuracy and completeness cannot be guaranteed. You are hereby notified that any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be unlawful. Mayberry may effect transactions or have positions in securities mentioned herein. In addition, employees of Mayberry may have positions and effect transactions in the securities mentioned herein.