The Monetary Policy Committee (MPC), at its March 27 and March 28 meeting, unanimously agreed to hold the policy interest rate (the rate offered to deposit-taking institutions on overnight placements with Bank of Jamaica) at 7.00 per cent, to maintain tight Jamaican dollar liquidity and to continue fostering relative stability in the foreign exchange market.
The Bank’s liquidity management strategy incorporates the impact of the one percentage point increase in the domestic and the foreign currency Cash Reserve Requirements applicable to DTIs, effective April 1.
The decisions were informed by the MPC’s view that incoming data were generally favourable for inflation continuing to ease and returning to the target range of 4.0 to 6.0 per cent by the December 2023 quarter.
Jamaica’s inflation rate of 7.8 per cent at February 2023 was below the 8.1 per cent recorded at January 2023. The key external drivers of headline inflation, such as grains, fuel and shipping prices, continued to decline broadly in line with the Bank’s expectations. In addition, inflation expectations continued to track downward. Core inflation (which excludes food and fuel prices from the Consumer Price Index) also decelerated to 6.6 per cent at February from 7.1 per cent at January 2023. The pace of monetary tightening by the United States (US) Federal Reserve Board (Fed) also slowed as expected. Moreover, recent developments in the US banking system suggest that this slowing could continue as interest rates in that economy may be near their peak.
The MPC also noted that interest rates in the domestic money and capital markets and the term rates offered by deposit-taking institutions have generally increased in line with the policy rate. However, the DTI sector has so far made only marginal adjustments to saving deposits and lending rates. Preliminary survey data indicate that these rates will be adjusted upward by marginal amounts in the near future. Notwithstanding the slow response of selected saving and lending rates to monetary policy signals, respondents to Bank of Jamaica’s Quarterly Credit Conditions Survey indicated that banks tightened credit terms for the December 2022 quarter. Credit terms are expected to tighten further for the March and June 2023 quarters. The MPC noted that the banking system remains sound with adequate capital and liquidity.
Notwithstanding the favourable outlook, the MPC’s assessment is that the near-term risks to the inflation outlook remain elevated. Against the background of continued growth in the domestic economy, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation. Higher inflation could also occur from a worsening in supply chain conditions and higher commodity prices if there are further geo-political disruptions. On the downside, weaker-than-expected global growth could negatively affect domestic demand and some projected adjustments to regulated prices may not materialise.
The MPC’s decisions were also based on the following assessments:
- The trend in inflation has generally tracked in line with the Bank’s expectations. The inflation rate at February 2023 primarily reflected upward movements in the Food and Non-Alcoholic Beverages, Restaurants and Accommodations Services, as well as Housing, Water, Electricity and Other Fuels divisions of the Consumer Price Index. The annual increase in Food and Non-Alcoholic Beverages resulted largely from higher prices for cereals, cereal products and vegetables. The increase in Restaurants and Accommodations Services primarily reflected the lagged impact of international commodity prices.
- Consistent with global consensus forecasts for a fall in commodity prices and the Bank’s overall monetary policy stance, and in the absence of new shocks, the Bank forecasts that inflation is on track to continue decelerating in 2023. However, one-off regulated price adjustments may result in a temporary uptick in inflation. The forecast also assumes that the public’s expectation for future inflation will continue to fall as the prices of imported commodities decline and domestic monetary policy actions take effect.
- The Jamaican economy continued to perform creditably, and the likelihood that Gross Domestic Product for the fiscal year 2022/23 will grow by 4.0 to 5.5 per cent remains high. GDP grew by an estimated 3.0 to 4.5 per cent for the December 2022 quarter, driven by continued strong growth in Tourism and its allied services, Manufacturing, Installation and Agriculture. For the March 2023 quarter, a 4.0 to 5.0 per cent growth is anticipated.
Future monetary policy decisions to return inflation to the Bank’s target range will depend on the incoming data. The Bank will continue to closely monitor the global and domestic economic environments for potential risks that could threaten Jamaica’s inflation target. At the same time, Bank of Jamaica continues its review of the monetary transmission mechanism to ensure that monetary policy achieves the desired impact on inflation.