Jamaica hikes rate to curb risk inflation falls below target21st May 2019
Jamaica’s central bank said its third rate hike this year was aimed at stimulating an even faster expansion of private sector credit and economic activity to to help inflation return to the midpoint of its target and reduce the risk inflation will fall below its target in the next three years.
The Bank of Jamaica (BOJ), which on Saturday announced the 50-basis-point cut in its policy rate to 0.75 percent on Twitter ahead of today’s press release, has now lowered its rate 11 times and by a total of 300 basis points since July 2017 when it adopted the overnight deposit rate as its policy rate as part of a reform of its monetary policy framework.
In addition to rate hikes, BOJ has also loosened its policy stance by lowering the reserve requirement for commercial banks twice this year by a total of 500 basis points to lower the cost of credit for businesses and households to boost economic activity and inflation.
Jamaica’s inflation rate has come down following a 2013 agreement with the International Monetary Fund (IMF) and after fluctuating within BOJ’s target range of 4-6 percent in 2017, inflation fell below the lower limit in March last year and then again toward the end of 2018 and in the first three months of this year.
In April the inflation rate rose to 4.0 percent from 3.4 percent in March and the central bank expects inflation to rise and average 4.5 percent over the next 8 quarters.
However, BOJ also said there will be months when inflation falls below the lower limit and after March 2020 inflation will decline towards the bottom of its target range and only slowly return to the mid-point over the following three years.
“Of note, the projected trajectory of inflation is lower than previously forecasted,” BOJ said, adding this reflects its view that inflation expectations are now lower than previously assessed and the projected pace of expansion in domestic demand after next March will be slower due to headwinds from the global economy.
In general, BOJ said economic data remain positive, with foreign reserves above the level deemed adequate, the current account sustainable, market interest rates low, labour market conditions continue to improve and the fiscal performance is strong.
Jamaica’s dollar has fluctuated between 137 and 126 to the U.S. dollar since early 2018 and this year has depreciated since mid-March after dropping from early February.
Today the Jamaican dollar was trading at 135.6 to the U.S. dollar, down almost 6 percent this year.
The Bank of Jamaica released the following press release:
“Bank of Jamaica announces its decision to lower the policy interest rate (the rate offered on overnight balances with Bank of Jamaica) by 50 basis points to 0.75 per cent per annum, effective 20 May 2019.
This decision reflects Bank of Jamaica’s assessment that, while inflation is expected to increase to average 4.5 per cent over the next eight quarters, there will be months when inflation will fall below the lower limit of the Bank’s target of 4.0 per cent to 6.0 per cent in the context of low underlying inflation. The forecast is for inflation thereafter to approach the midpoint of the target gradually but at a slower pace than previously expected at the last assessment in February 2019.
As with the last decision announced in March 2019, Bank of Jamaica’s decision today to lower the policy rate is intended to stimulate an even faster expansion in private sector credit which should lead to higher economic activity, consistent with the inflation target. This action will support inflation returning more quickly to the centre of the target.
Annual inflation at April 2019 reported by the Statistical Institute of Jamaica was 3.9 per cent, up from 3.4 per cent at March 2019 and 3.2 per cent at April 2018. While annual inflation has been rising, underlying inflation remained low.
Bank of Jamaica anticipates that inflation will rise towards the mid-point of the target by the March 2020 quarter as (i) domestic agriculture prices increase from the low levels of recent months to more normal levels and (ii) domestic economic activity increases in response to the lowering of the policy rate over the last eight quarters.
However, inflation is not expected to stay at the mid-point of the target but will decline towards the bottom of the target in the period after the March 2020 quarter and only return to the mid-point slowly over the ensuing three years. This outlook carries a material risk that inflation will fall below the target again during that period in the absence of a policy response.
Of note, the projected trajectory of inflation is lower than previously forecasted. This reflects the Bank’s view that inflation expectations are lower than previously assessed and the projected pace of expansion in domestic demand in the period after the March 2020 quarter will be slower due to headwinds from the global economy.
The risks to the inflation forecast are assessed to be balanced. The main upside risk, which could cause inflation to be higher than forecasted, is the possibility of higher-than-anticipated crude oil prices. The main downside risks, which could cause inflation to be lower than forecasted, include better-than-anticipated production in the agriculture sector which could lead to lower food-price inflation. In addition, growth could be lower than projected if global trade tensions escalate.
Other macroeconomic indicators continue to be positive. Foreign reserves remain above the level deemed to be adequate, the current account of the balance of payments remains sustainable, market interest rates are low, labour market conditions continue to improve and fiscal performance is strong.
The next policy decision announcement date is 27 June 2019.”
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