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JAM | Aug 18, 2022

More BOJ rate hikes anticipated though price pressures easing

/ Our Today

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The Bank of Jamaica in downtown Kingston. (Photo: JIS)

Durrant Pate/Contributor

Market watchers are eagerly anticipating tomorrow’s policy rate announcement by the Bank of Jamaica (BOJ), with NCB Capital Markets, the biggest player in the market, anxious that the rate hike will continue even with price pressure easing.

NCB Cap Market is basing its assessment on the fact that while pressures are easing, inflation remains significantly above the four-to-six per cent target range with Jamaica’s annual inflation from July 2021-July 2022 jumping into double digits, registering an increase of 10.2 per cent.

The Statistical Institute of Jamaica (STATIN), which measures Jamaica’s inflation, reported that inflation for July went up 0.7 per cent.

With this high inflation level, NCB Cap Market says, “the BOJ will likely continue its rate hikes to quell inflationary pressures and get the inflation rate back within its target range, including at its next policy rate decision announcement on August 18, 2022.”

Commodity prices have been falling on fears that a global recession could cause a reduction in production worldwide. This softening in these major inflation-inducing variables, along with the declining inflation rate in the US and Jamaica, points to a possible peak in inflation.

NCB Capital Markets, in its weekly Market Guide, points to the fact that globally, “although price pressures are easing, we don’t hold the view that central banks will halt their rate hikes in the near term, as inflation is still at historic highs. Despite positive signs last week that inflation could be easing, inflation in the US remains high and well above its target range of two per cent.”

Slower increases in consumer prices

As such, the money market NCB subsidiary has assessed that the Federal Reserve is unlikely to pivot from its hawkish interest rate hikes until rates fall towards healthy levels. However, NCB Cap Market is conceding that “the softening in prices is also translating into slower increases in consumer prices in some developed and developing countries”.

In the US, the point-to-point inflation rate decreased to 8.5 per cent in July, down from 9.1 per cent in June, which is an indication that price pressures may have peaked. Similarly, locally, point-to-point inflation declined to 10.2 per cent for July from 10.9 per cent in June 2022.

July’s inflation figure was in-line with expectations as the BOJ indicated in its latest monetary policy report that the inflation rate was expected to reach its peak in June 2022. With the easing in commodity and shipping prices and inflation seemingly peaking, will central banks halt their policy rate hikes in the coming months?

Case for halting rate hike

The case for halting might be even stronger given the increasing probability of a recession in the near term in many developed and developing countries, as such a move may even be justified to stave off a downturn.

The International Energy Agency (IEA), which is an autonomous inter-governmental organization, raised its forecast for oil demand for 2023, but reduced its forecast for 2022 as other factors that contribute to inflation namely, food prices have been decreasing from high levels in recent months.

Based in Paris and established in 1974, the IEA provides policy recommendations, analysis and data on the entire global energy sector. The Food and Agriculture Organization (FAO) has noted an 11.8 per cent decline in global food prices for July relative to the peak price level in March.

This decline in food prices has been reflected locally. Food prices in Jamaica have been declining over the last four months, albeit at a much slower pace than reported by the FAO as prices tend to be sticky downwards, hinting that a halt in rates might be on the table.

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