The Bank of Jamaica’s (BOJ) Monetary Policy Committee has again raised its policy rate this time to 6.5 per cent per annum effective September 30. The cumulative increase in the policy rate is 600 basis points since October 2021.

This has elicited condemnation, with business leaders, the press and economists regarding this move as ill-advised and likely to hurt the Jamaican economy.

Dr Samuel Braithwaite, a lecturer of economics at the Mona campus of the University of the West Indies (UWI) has joined the chorus of disapproval.

As a panellist at Sterling Asset Management’s investor briefing entitled, ‘Inflation: How policy will impact your Investments, Business & Lifestyle’, held at the Spanish Court Hotel last week, Braithwaite posited that raising interest rates would have the reverse effect, fuelling inflation.

“I’m not a fan of the Central Bank increasing its rate to 6.5 per cent. When firms go to the banks to borrow money to build their businesses, pay off debt and so on, they are faced with these high-interest rates and what are they going to do? They are going to pass on those high-interest rates to the consumer. This is economic theory.

“We have to be cognizant that in the Caribbean, the thing we want to prevent by raising interest rates, fuels it,” declared the young economics lecturer.

He went on to point out that the International Monetary Fund (IMF) has a rule of thumb that the neutral rate should be four per cent but that the BOJ’s rate here is between 2.5 per cent and seven per cent.

“I wouldn’t be surprised by the end of this year we get a policy rate of seven per cent and above, quipped Dr Braithwaite.

The way Dr Braithwaite sees it, Governor Richard Byles and the Bank of Jamaica are using a blunt tool to curb inflation.

He continued: “When it comes to monetary policy, the general rule applies- you can lead a horse to water but you can’t make it drink.

“Speaking in Parliament, Byles and his team revealed that in a survey of firms conducted by the BOJ, 70 per cent of them didn’t understand inflation targeting and 60 per cent didn’t know what the point-to-point inflation rate is. Here it is, you are creating policy for people who don’t understand what you are doing.”

“What the BOJ is doing is trying to influence behaviour with the tools that it has. If the people you are trying to influence don’t understand what you are doing, then what? What they do understand is when they go to the banks and are faced with high-interest rates, they are not going to suffer. They will either pass on those costs or close the business down.”

He illustrated his point with an anecdote about a friend who is in the food business and told him he was about to open a second shop. He enquired whether this was a good move given rising interest rates. The friend said he didn’t borrow from the banks but turned to family and friends who frontloaded him.

“You look at the Chinese businesses, same thing, they don’t go to local banks. Raising interest rates doesn’t work in Jamaica and the Caribbean. It may work in the US and the UK. People say the BOJ is being textbookish but these textbooks are not written with Jamaica in mind. It’s written for a different reality.

“The BOJ is wrong. In the US they can talk about slowing down the economy and going into recession. Why? Because guess what? They have money to pay stimulus to people. The US is the most indebted country in the world and the debt is in US dollars, which it prints. Jamaica doesn’t have that luxury. Most of the people who write these great articles and books on economics and inflation are not Jamaicans. Increased interest rates fuel inflation.”