With inflation cantering at an alarming rate, the Bank of Jamaica (BOJ) has announced its decision to increase the policy interest rate (the rate offered to deposit-taking institutions on overnight placements with the Central Bank) by 50 basis points to 2.00 per cent per annum, effective Wednesday (November 17).

According to the Statistical Institute of Jamaica (STATIN) consumer prices rose to 8.5 per cent in October compared to the same time last year. The BOJ’s stated mission is to preside over inflation within a band of 4 to 6 per cent and to use its toolkit to contain it within that parameter.

Rising prices, supply-chain bottlenecks, increased shipping costs and commodities jumping astronomically are the order of the day the world over.

In the United States, consumers are bemoaning escalating prices and the impact that is having on salaries and wages. Rampant inflation is dominating the news cycle.

Closer to home, Jamaicans are experiencing not only rising inflation but a depreciating dollar which will put many under tremendous stress and strain. The cost of most goods will be going up and so will the demand for wage and salary increases.

A release issued by the BOJ read: “Accompanying this latest rate increase, the BOJ decided to maintain other measures to contain Jamaican dollar liquidity expansion. While not targeting any specific level of the exchange rate, Bank of Jamaica will continue to ensure that movements in the exchange rate do not threaten the inflation target. Consistent with meeting its inflation target sustainably in the medium term, the Bank’s Monetary Policy Committee (MPC) agreed to consider further increases in the bank’s policy rate (and by extension raising real interest rates, which are currently significantly negative) and maintain or intensify the accompanying measures at subsequent policy meetings. This position is subject to inflation expectations, other macroeconomic data and, consequently, the inflation outlook evolving as projected.”

“In general, monetary policy decisions taken by Bank of Jamaica are aimed at ensuring that the annual increase in the prices of consumer goods and services (i.e. inflation) remains within the Bank’s inflation target of 4.0 per cent to 6.0 per cent,” the Central Bank noted.

“The decision to further reduce the level of monetary policy accommodation was made unanimously by the MPC. This was based on the MPC’s assessment that this action was necessary to limit the second-round effects of recent shocks and to guide inflation back within the target range over the next two years,” the BOJ indicated further.

The Governor of the BOJ, Richard Byles and his team were pilloried at the end of September when the Monetary Policy Committee (MPC) took the decision to raise the policy interest rate by 100 basis points. Then, Governor Byles explained that the inflationary impact on many Jamaicans already impacted by the ravishes of the COVID-19 pandemic would be arduous and debilitating.

Critics and experts argued that inflationary pressures would be transitory and that a move to raise interest rates would affect access to credit and hurt businesses thus slowing economic growth.

The Governor has insisted attention must be paid to the plight of ordinary folk in Jamaica and the cost of living they have to bear.

Addressing the desired effect of this latest increase in the interest rate, the BOJ added: “This reduction in the level of monetary accommodation will cause market-based interest rates to rise further, which will make the returns on Jamaican dollar assets more attractive relative to foreign currency assets. It will also make saving in Jamaican dollars more attractive and borrowing in Jamaican dollars more expensive. These effects are intended to temper the demand for foreign currency and hence moderate the pace of depreciation in the exchange rate; and, generally, reduce demand in the economy and with it the ability of businesses to pass on price increases to consumers.”

Will inflation abate any time soon?

Many said it was nothing to worry about and that economies would come roaring back this year. Pent-up demand would provide the tide that all boats would float on. Well, inflation at levels not seen in years has stuck a big pin in that balloon. That now looks very optimistic and it may take some time before prices settle down.

So what does the BOJ see on the horizon for inflation?

“Inflation is projected to average 5.5 per cent to 6.5 per cent over the next two years. Inflation will continue to breach the upper limit of the Bank’s target range over the next 10 to 12 months at higher rates than were envisaged in the previous forecast and is projected to peak in the range 8.0 per cent to 9.0 per cent over this period. The inflation forecast assumes, inter-alia, the continued transmission of higher international commodity and shipping prices to domestic processed food, food-related services and energy price inflation as well as a recovery in domestic demand.”