BOJ commends commercial banks for not passing on previous policy rate hike

Further monetary tightening is on the horizon as the Bank of Jamaica (BOJ) moves to cauterize the island’s runaway dollar.

The monetary tightening, the BOJ says will also aid in bringing down Jamaica’s rising inflation rate, which has the exceeded the central bank’s target of four per cent to six per cent but is now running at 9.7 per cent.

BOJ Governor Richard Byles said excess liquidity in the money market is among the contributor for the rising inflation rate and runaway dollar.

Speaking yesterday (February 21) during his quarterly news briefing, Byles admitted that liquidity in the money market is far too high and is causing some instability in the foreign exchange (FX) market.

To correct this instability, Byles argued that the BOJ’s Monetary Policy Committee (MPC) met last week and voted unanimously to increase the bank’s policy rate by 150 bps to 4.00 per cent, effective yesterday.

Stronger measures to contain liquidity expansion

In addition to that, the Central Bank governor disclosed that “the Committee also decided to pursue stronger measures to contain Jamaican dollar liquidity expansion and to maintain stability in the FX market. Some of these actions include issuing longer tenor open market instruments, direct FX sales to the energy sector and ensuring adherence to FX investment limits by regulated financial institutions”.

He said these stronger policy actions should result in a tightening of liquidity, an improvement in the preference for Jamaican dollar assets and consequently greater stability in the FX market. In turn this should take some pressure off inflation.

Byles indicated that the monetary tightening is also as a result of concerns over the prospects of earlier and stronger monetary policy tightening by our major trading partners, notably the United States.

The concern stems from the fact that such policy actions may result in capital outflows, which could cause pressures on the exchange rate if domestic monetary policy is not appropriately aligned.

Banks gets commendation from BOJ governor

The banking sector got high commendations from the Governor, who complimented banks for not passing on to its customers the increase in policy rates in recent times as well adjustments made by the BOJ last December in the FX net open position (NOP) limits for deposit-taking institutions (DTIs) to support fight against destabilizing movements in the exchange rate. 

He made the point that, “with these policy adjustments, we noted that while interest rates in the money markets have increased, banks remained relatively liquid and, for the most part, have not passed on the policy rate increases to their customers who hold deposits with them. This means that to the public J$ assets/deposits have not become more attractive compared to US$ assets, leading to a preference for foreign assets and pressure on the foreign exchange market”.

Turning to the wider economy, the Central Bank governor reported that economic activity and employment continue to rebound, inflows into the foreign exchange market are buoyant and Jamaica’s international reserves have remained strong. He pointed out that recent developments in domestic inflation and the outlook for inflation are however an ongoing source of concern for the BOJ.

These developments, he contended “have prompted the central bank to pursue stronger measures to influence a return of inflation to the target of 4 per cent to 6 per cent in the near term. The inflation rate for the 12 months leading up to January 2022, as released last Tuesday by the Statistical Institute of Jamaica was 9.7 per cent”.

This represents the sixth successive month that inflation has been above the BOJ’s target range of 4.0 to 6.0 per cent. The January 2022 outturn mainly reflected high energy-related inflation, due to increases in electricity rates.

In addition, the prices for processed foods and services accelerated due to the continued lagged and second round impact of higher international grains and freight costs, which have been the principal contributors to rising inflation over the past few months.