BOJ pivots
Central bank starts easing borrowing conditions while holding rates
BANK of Jamaica (BOJ) on Friday left interest rates steady, as inflation cools, but gave the clearest signal yet that rates could be coming down soon.
For the time being, while the central bank stayed away from cutting rates from the seven per cent it has been since November 2022, it said, however, it will start to take steps to make it easier to borrow, on signs that “there has been significant success in the fight against high and unpredictable inflation in Jamaica”.
Inflation has declined for the last four months, including being in the target range of four to six per cent for the last three of those months, touching 5.2 per cent in May. The BOJ puts that down to its actions to contain domestic demand, a stable exchange rate, and a decline in imported inflation.
Officials also now forecast that inflation will “generally remain within the target range over the next two years, except for a few months in 2025”, as information suggests wage pressures have eased and business leaders see prices remaining more stable over the next few months. Altogether, the central bank said the conditions mean it will soon be making a downward revision of its projections for price increases.
The improved inflation outlook was enough for the BOJ’s Monetary Policy Committee (MPC), at its June 26 and 27 meetings, to “uanimously” agree that it will “start a gradual easing of its monetary policy stance”.
It said that easing will see it gradually reducing how much money it absorbs from deposit-taking institutions, with expectations that the action will allow the banks to have more money to lend to the productive sector while it will also start reducing rates in the money market.
“However, the MPC decided to maintain the policy rate at 7 per cent per annum, at this time, and to continue its proactive stance of preserving relative stability in the foreign exchange market,” the BOJ wrote.
Still it points out that risks remain, including from rising international shipping costs and the possibility of worse-than-anticipated weather conditions due to the emerging La Niña weather phenomenon.
It added that if incoming data continue to “indicate a sustained anchoring of inflation within the target range [it] could lead to further easing of monetary policy”.
And the central bank did not shy away from giving itself a pat on the back, arguing that the tight monetary policy stance it has implemented over the last three years “was appropriate”, given that it has resulted in “reduced inflation by constraining domestic aggregate demand and minimising the impact of imported inflation as a result of the stability in the foreign exchange market”.
That aside, it said its decision to keep rates steady, but prepared to cut them if conditions continue to improve, was driven by a few factors.
Those factors include the economy continuing to grow, though the growth has slowed. Statin on Friday released final data showing growth on 1.4 per cent in the March quarter while the central bank said there are signs that the economy continued to expand in the June 2024 quarter.
It added that, on the downside, escalations in geopolitical tensions could adversely affect global growth and, hence, external demand, while better-than-expected growth in the global economy could improve external demand.
An eye is also being kept on the United States and its inflation data, which will influence what the Federal Reserve (Fed) does in relation to interest rates in that market. BOJ typically keeps Jamaica’s policy rate slightly above that of the US, to prevent capital flight. But with inflation in the world’s biggest economy at 3.3 per cent in May — still above the US Federal Reserve target of two per cent — and expected to remain above the level for the remainder of 2024 the forecast is that no more than one rate cut could be implemented in that country. Add to that is a recommendation from IMF Managing Director Kristalina Georgieva that the Federal Reserve should wait to cut interest rates until “at least” the end of the year. The US is the only G20 economy to see growth above pre-pandemic levels, and “robust” growth indicates ongoing upside risks to inflation, the 190-country agency said.
“We do recognise important upside risks,” Georgieva said at a press briefing on Thursday. “Given those risks, we agree that the Fed should keep policy rates at current levels until at least late 2024.” The Fed’s current fed funds rate has stood within the range of 5.25 to 5.50 per cent since July 2023.
The BOJ’s MPC meets again on August 16 and 19 to consider its monetary policy stance, and will communicate its decision on August 20 ahead of a quarterly monetary policy press briefing on August 21.