Ahead of new inflation report, BOJ warns slow move downwards for interest rates
What the minutes of the monetary policy meeting say
AFTER slashing its key interest rate twice by a quarter percentage point in its August and September meetings, bringing it to 6.5 per cent, the Bank of Jamaica (BOJ) has indicated that future reductions will continue in a similarly measured way despite inflation expected to ease faster than previously predicted. The indication came in the minutes of the September 26 and 27, 2024 meeting of the central bank’s monetary policy committee (MPC).
The minutes, which are published four weeks after the meeting, with this one was published at the end of October, noted that the committee, in its deliberations over the level it would cut rates, considered. “various degrees of reduction in the policy rate.” But, more importantly, it pointed out that, after considering the “uncertainties and attendant risks,” the decision was made that “the glide path for future interest rate adjustments should be gradual”.
The implications of that statement is that there will be no immediate drastic rate cuts, and further interest rate reductions will only be implemented when the data indicate they can be made as the central bank prioritises stability and caution while working to put a damper on inflation and trying to keep the economy from tilting into a recession.
“It is expected that the BOJ will continue to gradually reduce interest rates due to the moderation of inflation as evidenced by the 5.7 per cent out-turn in September 2024,” Keith Duncan, co-chairman of the Economic Programme Oversight Committee (EPOC), noted in a written response to Jamaica Observer queries.
Measured from a year ago, the increases in the prices for consumer goods, such as food, rent, electricity, transportation and health care, have been below the 6 per cent upper limit the central bank tries to keep prices from rising above on an annual basis for six of the last seven month This includes the 5.7 per cent out-turn Duncan points to in September.
Come this Friday, a new set of inflation numbers will be published by the Statistical Institute of Jamaica (Statin), and from all indications, the trend of price increases falling in the “sweet spot” of between 4 per cent and 6 per cent, as BOJ Governor Richard Byles calls the target range, is expected to continue.
“Prices appeared to have peaked in August 2024,” the MPC minutes noted about the 6.5 per cent inflation in August, which was the one month of the last seven in which inflation was higher than targeted.
More importantly, core inflation — which tracks long-term trend in price increases since it covers only changes in the cost of things like rent, health care, education, clothing and bus fares — which tends to change slower than the volatile prices for food and energy, “for August 2024, decelerated to 4.2 per cent, down from the previous out-turn of 4.5 per cent and lower than the projection of 4.7 per cent due to moderating demand,” the minutes said.
It is core inflation that central bank’s pay more attention to when setting monetary policy and making informed decisions about interest rates. This core inflation, the BOJ said, “is likely to be below forecast over the near term”.
Still, there is a delicate dance the BOJ must perform in cutting rates further.
“It is also important for the BOJ to continue with the easing of monetary policy as the Jamaican economy slows,” Duncan noted. Statin’s final data, released just over a month ago, show the economy expanded by a meagre 0.2 per cent from April to June 2024, which was lower than the BOJ’s estimate that it had grown o.4 per cent. And the slowing of economic activity is expected to continue.
“When the adverse impact of Hurricane Beryl on domestic economic activity in July 2024 is taken into account, GDP growth for the September 2024 quarter is projected to fall in the range of -1.5 to 0.5 per cent, which is lower than the previous forecast, when compared with the September 2023 quarter,” the central bank’s MPC said.
This is the first time since the COVID-19-induced economic decline that Jamaica’s economy is forecast to contract, though the upper end of the range suggests that the country could scrape through to register at least some growth, after being squeezed for the last three years by high interest rates designed to dampen demand, and by extension, cauterise runaway inflation that peaked at 11.8 per cent in April 2022.
“It doesn’t sound nice to say it but it’s true. You have to squeeze the economy, compress it, stop it from growing and in that way, prices will cool off. It’s like taking a hammer to kill a fly, but that is the tool that we do have,” Byles told the audience at the Insurance Association of Jamaica Business Conference and Awards Ceremony on September 11 in Kingston ahead of the second rate cut on September 30.
High interest rates drive people and corporations to borrow less.
Growth in new mortgages has been declining since the December 2021 quarter, broadly consistent with the period of the MPCs tight monetary policy stance. From December 2022 to June 2024, real new mortgages contracted by an average annual rate of 6 per cent, which coincided with a 1.3 percentage point increase in mortgage rates.
In the prior period from March 2018 to September 2022, mortgages grew at an annual pace of 16 per cent. And there are signs that net new domestic currency loans to the private sector for the June 2024 quarter was lower than the flows in both the March 2024 and June 2023 quarters.
The challenge is to slow the economy enough to drive out inflation, but not too much to cause it to crash, in other words, engineer a “soft landing” on “the glide path” the central bank has said it will be using for interest rate reductions going forward.
The central bank governor has, however, pointed out that any economic contraction would not result from inflation and the tools that are used, but can be blamed on Beryl, “which has done such serious damage to our food supply.”
The good news is that the decline is not expected to last too long. Though there are expectations that real GDP will either contract or be close to contraction in this fiscal year, the forecast is for growth to return in the range of 1 per cent to 3 per cent in the next fiscal year that runs from April 1, 2025 to March 31, 2026.
But Duncan is hoping the BOJ will take steps to accelerate this forecast.
“Due to possibly the lagged impact of tight monetary policy, it is almost an imperative to reduce interest rates to reverse this slowing of private credit,” Duncan added with an eye on what the central bank will do when its MPC meets again on November 19 and 20, before communicating its decision to the market on November 21.
“Governor Richard Byles has indicated that the BOJ is watching the US Federal Reserve [own] movement of interest rates. There is market consensus that the Fed will reduce interest rates on Thursday of this week, which should give the BOJ a pathway to further interest rate reduction,” the EPOC chairman added.
Thursday, as predicted, that expectation was fulfilled with the Fed cutting its policy rate for a second time in a row, this time by a quarter of a percentage point as policymakers took note of a job market that has “generally eased” while inflation continues to move towards the central bank’s 2 per cent target. The cut brings the federal funds rate, the benchmark rate in the U.S. to a range of 4.5 per cent to 4.75 per cent, which gives the BOJ some wiggle room to cut rates while maintaining a healthy spread that prevents capital flight.
Beyond that, another issue the central bank has to manage, when considering rate cuts, is the impact it is likely to have on the value of the currency. For the most part, when the central bank hiked its policy rate nine times between October 2021 and November 2022 from 0.5 per cent to 7 per cent, it was done with an eye on ensuring that rising commodity prices, such as for grains and fuel, do not hit consumers with a double whammy due to a sliding dollar.
“In a time of high inflation when we are importing 60 per cent of everything that we consume, we have to watch that exchange rate very carefully, because on top of imported inflation, if our exchange rate depreciates too quickly too far, we will get twice the amount of inflation,” Byles noted in that September 11 speech to insurance executives.
To help stabilise prices, the central bank sold US$2.5 billion into the market between October 2021 and August of this year, but the country’s earnings of foreign exchange, chiefly from remittances and tourism receipts, helped to keep the foreign reserves strong, and t went up from US$3.8 billion in October 2021 to US$5.7 billion at the end of October 2024, enough to cover nearly 10 months of imports.