However, higher inflation possible from a worsening supply chain conditions and higher commodity prices

Durrant Pate/Contributor

Jamaica’s inflation should continue to decelerate in 2023 is the latest projection coming from the Bank of Jamaica (BOJ) in its monetary policy statement, released last evening (February 20).

The BOJ reports that inflation expectations continued to track downward, as the key external drivers of headline inflation, such as grains, fuel and shipping prices, continue to decline and the forecasts for these variables have been lowered. In addition, the pace of monetary tightening by the United States Federal Reserve Board also appeared to be slowing, as expected with future rate increases by the American Central Bank will likely be moderate.

In its monetary policy statement, the BOJ argues that, “in this context, consistent with global consensus forecasts for a fall in commodity prices and the Bank’s overall monetary policy stance, and in the absence of any new shocks, inflation is projected to continue to decelerate in 2023. This forecast envisages that annual inflation will fall within the Bank’s inflation target range of 4.0 per cent to 6.0 per cent by the December 2023 quarter and remain generally at that level over the medium-term”.

Risks to inflation outlook

However, the BOJ cited certain near-term risks to the inflation outlook, which it says are elevated and skewed to the upside. The Central Bank of Jamaica was quick to point out that “in a context where the domestic economy continues to grow, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation”.

In commenting on the local financial system, the BOJ contends that “the projected level of liquidity in the financial system, if left unchecked, poses material risks to the achievement of the inflation target as well as to the maintenance of stability in the foreign exchange market. Higher inflation could also ensue from a worsening in supply chain conditions and higher commodity prices if there are further geo-political disruptions”.

On the downside, it says weaker-than-expected global growth could negatively affect domestic demand and some projected adjustments to regulated prices may not materialise.

In spite of these risks, the BOJ is anticipating that “economic growth for FY2022/23 will be driven by the services industry, particularly tourism. For the upcoming 2023/24 financial year, economic growth is projected to moderate somewhat, as income growth among Jamaica’s main trading partners normalises to pre-COVID rates”.

According to the BOJ, “in the absence of new shocks, future monetary policy decisions aimed at returning inflation to the Bank’s target range, including further adjustments to the cash reserve requirement, will depend on the state of liquidity in the financial system and the continued pass-through effect of monetary policy on deposit and loan rates. The decisions will also depend on the MPC (Monetary Policy Committee) seeing more pass-through of international commodity price reductions to domestic prices and the Fed continuing to slow its policy rate increases”.

The BOJ says it will continue to closely monitor the global and domestic environments for potential risks that could further threaten the attainment of Jamaica’s inflation target.