BOJ rate cut likely insufficient to prevent September GDP decline
NEW information released by the Bank of Jamaica (BOJ) suggests that Jamaica could experience a contraction in gross domestic product (GDP) for the July to September quarter and it is unlikely that the modest reduction in policy rate, which took effect on Wednesday, will provide sufficient stimulus to alter the expected economic trajectory.
Earlier this week the BOJ signalled a shift in its monetary policy by reducing its policy rate by 25 basis points, bringing it down to 6.75 per cent as of August 21, 2024. The policy rate is what the BOJ uses to send signals to banks on the direction in which it wants lending rates to trend for businesses and consumers.
The decision followed a prolonged period of maintaining the rate at 7.0 per cent since November 2022.
“A reduction of 25 basis points is the beginning, we hope, of better times ahead when we can reduce rates in the future. It may not be [reduced] to the 50 basis points [it was before October 2021], but certainly it will come down; so I think we should interpret this as a cautious signal that we intend to loosen policy further in the future if conditions remain as positive as they are,” BOJ Governor Richard Byles said, during a press conference held on Wednesday.
He continued: “Will it impact GDP? I doubt it; but as I say, people can say to themselves when they are making decisions…well, interest rates generally in Jamaica are on the way down, barring unforeseen circumstances, and therefore they can start to put in place forward-looking plans.”
Jamaica has successfully kept inflation within the target range of four to six per cent for five consecutive months, with the latest figure at 5.1 per cent for July 2024, which was below the rate expected by the central bank. However, inflation is expected to temporarily rise above this range from August to December 2024, largely due to the impact of Hurricane Beryl on agricultural supplies and subsequent increases in consumer prices.
After this period, inflation is projected to return to the target range by early 2025.
GDP growth slowed to 1.4 per cent in the January to March 2024 quarter, and further slowing was seen in the June quarter.
“When the underlying direction of economic activity and the impact of the hurricane in July are taken into account, GDP for the September 2024 quarter is projected to contract when compared with the September 2023 quarter,” Byles said.
He added that with slower economic growth, demand for loans has decreased, and banks have become stricter with credit which has led to fewer loans being issued to businesses, further dampening economic activity.
On a positive note, businesses now expect inflation to continue dropping, which should influence pricing and wage decisions. The exchange rate has also stabilised, and the proportion of deposits held in US dollars has decreased, now below pre-pandemic levels.
For fiscal year 2024/25 — that is April 1, 2024 to March 31, 2025 — the central bank forecasts that the economy could contract by as much as 1.5 per cent. However, the forecast also said the economy could grow by as much as 0.5 per cent. Growth is expected to pick up in the next fiscal year with forecasts it could range between 1.5 per cent to 3.5 per cent for FY2025/26.
The FY2024/25 projection primarily reflects the anticipated negative effects of Hurricane Beryl on the economy, with expected contractions in agriculture, forestry and fishing, and construction. Conversely, the FY2025/26 outlook anticipates a partial recovery in economic activity after the declines of FY2024/25.
“The risks to the inflation outlook are balanced, which means that inflation is likely to be in line with projections,” Byles said.
“Rising international shipping costs, worse-than-anticipated impact of Hurricane Beryl and other adverse weather conditions could influence higher inflation. However, the factors that could result in lower-than-projected inflation include weaker-than-projected global growth, which could reduce domestic demand and imported inflation,” Byles noted, adding that any future monetary policy decision to reduce interest rates will continue to depend on incoming data.