BYLES...We have to keep an eye on what the Fed is doing and match what they're doing.
October 18, 2022
More rate increases expected despite September’s lower inflation
JAMAICANS hoping that Tuesday’s 9.3 per cent inflation, the lowest 12-month reading since December last year, will bring some respite from rising policy rates from the Bank of Jamaica (BOJ) next month could find that not to be the case as the central bank keeps a keen eye on the actions of the US Federal Reserve.
The US Federal Reserve in a bid to cool rampant inflation raised benchmark interest rates by three-quarters of a percentage point last month and indicated it will keep hiking well above the current level until it reaches a “terminal rate”, or end point, of 4.6 per cent in 2023. That implies a quarter-point rate rise next year but no decreases.
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Financial economist and CEO of the Quantas Financial Group Dr Adrian Stokes told the Jamaica Observer that a big factor that may influence the BOJ’s decision when its monetary policy committee meets next month is exactly what the Fed is doing.
“What the Bank of Jamaica seems to be doing is…watching what the US Federal Reserve is doing in terms of their own interest rates and trying to maintain a spread above that. If that remains the case, and especially with the Feds indicating that they will be increasing interest rates further, its hard to see our own central bank cutting rates soon,” Stokes told the Business Observer.
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Similar sentiments, though less strident, were expressed by Anya Walker, executive VP in charge of research, strategy innovation and projects at NCB Capital Markets.
Walker, in a note to the Business Observer, said that while inflation is declining and is expected to continue declining which could see the BOJ being “less aggressive” with its interest rate hikes at his next meeting, the central bank “is likely to sustain monetary tightening in the near term as it seeks to bring inflation back within its target range.”
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Their view seems to mirror that of Richard Byles, governor of the BOJ, who on Radio Jamaica‘s Beyond the Headlines programme with Dionne Jackson Miller on October 4, said the following: “Every time the Fed…moves up interest rate as they did [recently]…it makes our Jamaican dollar come under pressure. People are saying, ‘wait, American interest rates looking attractive’. So we have to keep an eye on what the Fed is doing and match what they’re doing to make sure we have a differential that makes people want to stay in Jamaica dollars and not go for US.”
Byles made the comment after indicating that without the rate hikes, the pressure that would have been brought to bear on the Jamaican currency would have caused inflation to be even higher than it has gone so far this year.
“Once that rate of exchange gets away from us, it is going to be very difficult to stop rampant inflation. If we think inflation is high now, what do you think it would be at $165,” he questioned while proferring a hypothetical exchange rate for analytical purposes.
“Can you imagine that we are going through the inflation of 10 per cent, 11 per cent and the exchange rate is moving? Let’s say that exchange rate was 165. I mean that’s, that would just be absolutely disastrous,” he continued.
“One of the main objectives we have tried to attain is a more stable exchange rate to dampen the effect of imported prices.”
However, despite raising its key policy rates from 0.5 per cent to 6.5 per cent in the last year, inflation remains stubborn and it appears banks are passing on hikes as quickly as the central bank would like, leaving the central bank governor to question pronouncements that the rate hike will be devastating to the economy.
Pointing out that economic expansion in the June quarter was measured at 4.8 per cent and the forecast that growth would top out at 4 per cent for the fiscal year with agriculture and tourism as the main drivers, Byles was strident in his interview.
“I don’t think that that argument that we will hurt growth is as strong as people make it out to be.”
“Let’s take commercial credit. So this is credit [banks provide] to businesses. In September of last year, [banks] were lending at a weighted average, 9.36 per cent. In July of this year, July, that just a couple months ago, [those banks] were lending at 9.09 per cent. That’s down. That’s not up. So I don’t know why the business people should be fussing.”
He said he understands that it is a weighted average rate which means some loan rates would have gone up and others down, but he said with things as they are now, there is little chance the central bank will be cutting rates anytime soon.
“We’ve been moving rates for one year now. You know, the first time we moved rates was in October of last year, so 12 months, we’ve being moving rates and we keep a very keen eye out for what is happening in the market. And the numbers that I’ve quoted you for July are the latest numbers that I have, and I am not seeing them percolate through. So, if after one year, this is what we are seeing, then I’m not in a position to say, I’m going to do a pivot. Do a U-turn and bring back rates down because I’m not seeing it actually percolating through the economy to savers nor to people who are borrowing.”
Dr Adrian Stokes believes the Federal Reserve hints about rate hikes could influence the Bank of Jamaica’s own decision on interest rates locally. (Photo: Adrian Creary)
