By CentralBankNews.info
Jamaica’s central bank lowered its policy rate for the 10th time, saying this was “to stimulate an even faster expansion in private sector credit which should lead to higher economic activity, consistent with the inflation target.”
The Bank of Jamaica (BOJ) cut its policy rate by another 25 basis points to 1.25 percent and has now cut it by a total of 250 basis points since July 1, 2017 when it adopted the overnight deposit rate as its new policy rate.
“The decision to lower the policy rate is aimed at supporting inflation returning to and remaining on target (4.0 percent to 6.0 percent) by December 2020,” BOJ added.
In February BOJ forecast inflation would dip below its target at various times over the next year – with the risks to this forecast balanced – before inflation would slowly converge toward the midpoint of its target in the medium term.
But BOJ said the risks to this forecast have shifted to the downside and inflation is more likely to trend below this path, mainly due to lower-than-projected pass-through of oil prices to domestic energy prices and the prospect of favorable weather could lead to lower increases in food prices.
Jamaica’s inflation rate in February rose slightly to 2.4 percent in February from 2.3 percent in January but this was still the third month in a row with inflation below its target.
“This suggest that recent improvements in economic activity have not been sufficient to return inflation to the target as quickly as desired,” BOJ said.
Over the next two years Jamaica’s economy is expected to grow below its potential and slower-than-expected global growth could also present a downside risks to domestic growth, BOJ added.
On the other hand, growth could also be higher than anticipated due to recently announced fiscal stimulus and positive developments in private sector credit, which grew 18.6 percent in January year-on-year from 14.4 percent in December 2018.
Earlier this month International Monetary Fund staff reached agreement on a fifth review on Jamaica’s stand-by arrangement, saying further monetary loosening was warranted to restore inflation to BOJ’s target.
The IMF board is expected to decide on the arrangement in April and upon approval an additional US$224 million will be made available, bridging the total accessible credit to $1.4 billion.
The Bank of Jamaica released the following statement:
The decision to lower the policy rate is aimed at supporting inflation returning to and remaining on target (4.0 per cent to 6.0 per cent) by December 2020. The rate reduction is intended to stimulate an even faster expansion in private sector credit which should lead to higher economic activity, consistent with the inflation target.
Inflation
At Bank of Jamaica’s last assessment in February 2019, inflation was projected to fall below the target at several points over the next year before slowly approaching the midpoint of the target over the medium term. In the near term (that is, over the next eight quarters), the key sources of upward price pressure were expected to emanate from (1) increases in domestic agriculture prices to more normal levels, (2) some imported inflation caused by a moderate increase in crude oil prices and (3) an improvement in domestic demand conditions resulting from Bank of Jamaica’s accommodative monetary policy stance over the past 18 months. The risks to the forecast were assessed to be balanced.
The Bank’s current assessment suggests that the risks to the inflation forecast have shifted to the downside (that is, inflation could be lower). Annual inflation at February 2019, as reported by the Statistical Institute of Jamaica, was 2.4 per cent, relative to 2.3 per cent at January 2019 and 4.4 per cent at February 2018. February 2019 is the third consecutive month that inflation has been below the target. Meanwhile, all measures of underlying inflation at February 2019 continued to be low. This suggests that recent improvements in economic activity have not been sufficient to return inflation to the target as quickly as desired.
Inflation is now more likely to trend below the projected path, mainly due to expectations for a lower-than-projected pass-through of international oil prices to domestic energy costs. In addition, the prospect of favourable weather conditions could result in lower-than-anticipated increases in agricultural prices.
Over the next two years, the economy is likely to continue reflecting some slack (that is, projected GDP growth being lower than Bank of Jamaica’s estimate of potential GDP growth). Growth prospects are heavily contingent on continued expansion in construction and mining, which both carry some downside risk. Global growth is also likely to be slower than previously anticipated over the period and could present a downside risk to domestic growth from weaker external demand.
That said, real GDP growth could also turn out to be somewhat higher than previously anticipated, largely based on the impact of the recently announced fiscal stimulus. There have also been positive developments in private sector credit, which is likely to expand faster than previously anticipated. Commercial bank credit to the private sector expanded year-over-year by 18.6 per cent at January 2019, above the expansion of 14.4 per cent at December 2018.
Other macroeconomic indicators continue to be positive. Foreign reserves remain above the level deemed to be adequate, market interest rates are low, the external accounts remain sustainable, labour market conditions are improving and fiscal performance is strong.
The next policy decision announcement date is 17 May 2019.”
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