Policy Interest Rate Remains the Same – BOJ

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The Bank of Jamaica (BOJ) has decided to keep the policy interest rate the same. A policy interest rate is that offered on overnight balances held at the Bank of Jamaica. The BOJ made this announcement in a news release last week. As a result of this announcement, the policy interest rate will stay at 0.75 percent per year. It will take effect on June 28,  2019.

The BOJ decided to keep the policy rate the same after it assessed monetary conditions and found them to be appropriate for supporting the achievement of the country’s inflation target. The country aims to achieve  4.0 percent to 6.0 percent inflation levels during the medium term.

Current Inflation

The Statistical Institute of Jamaica (STATIN)  reported that the annual inflation rate as at May 2019 was 4.8 percent. This represents an increase from 3.9 percent reported for April 2019 and 3.1 percent reported for May 2018. Also, the BOJ release noted that the inflation result for May 2019 is in line with its previous assessment. Furthermore, the result represents a return to the mid-point of the BOJ’s inflation target after five consecutive months of annual inflation falling below the target. Interestingly, while annual inflation rose, the underlying inflation level continues to trend downwards.

BOJ Inflation Forecasts

In May 2019, the Bank of Jamaica predicted that inflation would rise toward the mid-point by March 2020 quarter. According to the BOJ, this movement will occur after first falling towards the bottom of the inflation target.  In addition, the BOJ forecasts that an increase in domestic agriculture prices will drive inflation up. Furthermore, domestic economic activity will increase arising from the drop in the policy interest rate during the last eight quarters. The BOJ also forecasted that inflation would then fall towards the bottom of the inflation target during the period after the March 2020 quarter. However, within the next three years, inflation is forecasted to slowly increase towards the mid-point. The Bank, therefore, took this policy action to mitigate any material risk of inflation falling lower than the intended target next year (2020).

A Balanced Risk

In examining the policy risks, the BOJ assessed that such risks against the May 2019 remain balanced.  Evidently, this is a favourable position.  However, the BOJ assessment also found that, at 17.9 percent, credit to the private sector from banks, merchant banks, and building societies grew faster than the projected level for the 12 months to May 2019. Such growth is expected to be faster than previously anticipated. The BOJ’s forecast is also based on the monetary accommodation in the past.

Furthermore, this forecast represents an upside risk to economic activity and inflation. The BOJ expects that higher growth in GDP will result in higher inflation. On the downside, intensified tensions in global trading arrangements will result in a slowdown in global economic growth. Consequently, according to the BOJ, oil prices will fall and domestic demand for oil products over the next eight quarters will be weak. That said, the BOJ remains optimistic in its outlook on these inflation risks.

Other Economic Variables

On the other hand, the BOJ anticipated that during the next eight quarters the Jamaican economy is likely to continue to reflect some slack. That is, a lower than estimated GDP growth. However, the BOJ forecasted that the risks to projected GDP growth are balanced compared to being skewed to the downside. As global tensions rise, weaker global growth is likely to present further downside risks to the BOJ’s GDP growth and inflation targets.

The BOJ also concluded that other macroeconomic indicators remain positive. The central bank reported that foreign reserves remain above target levels and market interest rates are low. Furthermore, the external accounts remain sustainable and fiscal performance remains strong. In addition, the BOJ release indicated that the Jamaican labour market conditions are improving.

The BOJ is due to make another policy decision announcement on August 27, 2019.

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