BOJ set to abandon record low interest rate in defence of inflation target
Published:Saturday | August 21, 2021 | 12:09 AMHuntley Medley - Associate Business Editor
On Thursday, the Bank of Jamaica left in place the record low 0.5 per cent policy rate that has been held consistently at that level for two years, but concerns about rising inflation and a potential breach of the 4-6 per cent inflation target range are engendering a shift in the central bank’s stance on interest rates.
A rate hike is being contemplated as a moderating effect on prices that are now running ahead of projections amid a better outlook on economic growth.
Annual inflation in July at 5.3 per cent was tracking close to the top end of the target range, and above the average target of 5.0 per cent.
The 0.5 per cent policy rate unchanged since 2019, even at the apex of the coronavirus pandemic the following year, is now about to be raised as a number of local and global factors have coalesced to overrun the BOJ’s previous moderated inflation outlook.
A rise in BOJ’s policy rate could lead to banks and other lenders charging more for consumers and businesses to borrow through higher loan rates.
“The MPC (Monetary Policy Committee of the central bank) believes that for inflation to remain at five per cent over the medium term, there will be need for the bank to raise interest rates. While there is some uncertainty surrounding the inflation forecast, especially given the emergence of new variants of the coronavirus, the near-term risks are skewed to the upside,” BOJ Governor Richard Byles said of the MPC’s August 17-18 deliberations at a press briefing on Friday.
The MPC sets monetary policy to meet the inflation target mandated by the Government and is expected to announce higher rates following its next meeting, scheduled for September 30.
“Inflation is likely to breach the upper limit of the bank’s target range over the next year and gradually decelerate thereafter as the transitory effects of the pandemic fade,” said Byles.
“Going forward, the MPC anticipates that consumer price inflation will evolve in the range of 6 to 7 per cent over the September 2021 quarter to the June 2022 quarter,” he said.
A conflagration of events – that is, more COVID-19 infections; higher than targeted inflation in Jamaica’s major trading partner, United States, where inflation is tracking at 5.4 per cent, breaching its 2.0 per cent rate nearly three times; the lagged impact of higher global commodity and shipping prices; recovered domestic demand; an increase in inflation expectations; one-off adjustments in some regulated prices; continuing increases in house rental rates; and the impact of energy prices have conspired to raise the central bank’s inflation outlook over the next two years.
“While international commodity and shipping prices are expected to remain elevated in the short term, they are projected to fall as demand and supply imbalances in the global economy continue to improve,” the BOJ governor said, with some optimism.
Even so, the Byles has conceded that inflation could run ahead of the elevated projections as a result of higher than forecast inflation expectations, higher commodity prices, as well as the adverse impact of the current active hurricane season on agricultural food availability and prices, even as the impact of the recent passage of Tropical Storm Grace is still being assessed.
The central bank is otherwise more bullish on economic growth this year, and has raised its projections from 5-8 per cent to 7-10 per cent on the back of stronger than expected recovery in tourism and stronger performance of the construction sector.
“Economic activity is expected to improve over the near term, relative to the previous forecast, due to the impact of stronger than expected improvements in the economies of Jamaica’s major trading partners,” said the MPC report.
“In this context, growth in the services industry (particularly tourism) is expected to be stronger than previously anticipated. The economy is expected to return to pre-COVID-19 levels by the end of 2022,” the MPC said.