The Bank of Jamaica (BOJ) has increased its policy interest rate by 50 basis points to six per cent.
The measures are expected to cause interest rates on deposits and loans to rise further. Some deposit-taking institutions (DTIs) have already adjusted interest rates on deposits and loans.
In announcing the rate increase on Thursday, the central bank said inflation expectations remain elevated and, without stronger policy actions, may continue to rise.
Having peaked earlier and lower than expected in April 2022, inflation at May and June were both 10.9 per cent, followed by 10.2 per cent at July.
In determining the rate increase, Monetary Policy Committee (MPC) noted that the conditions that led to the recent inflation outturns appear to have not sufficiently solidified to ensure that inflation is sustainably on a downward path, and there remains a risk of reversal.
It also projected that inflation is projected to fall within the target range by the December 2023 quarter. This is two quarters later than previously projected.
Meanwhile, annual inflation is projected to range between nine per cent and 11 per cent for the remaining months of 2022. Inflation is projected to fall to single digits in early 2023, as long as the conflict between Russia and Ukraine do not escalate and inflation among Jamaica’s trading partners continues to fall, the bank said.
In addition, the BOJ’s baseline forecast assumes that the public’s expectation for future inflation will fall during the second half of 2022
What’s more, the low unemployment rate, reported labour shortages in selected sectors of the economy and pressures from the acceleration in domestic inflation carry the potential for future wage adjustments to exceed that required for the consolidation of low, stable and predictable inflation.
Finally, high inflation in the US and other trading partners has prompted a programme of faster monetary adjustment among the central banks of the advanced economies, which could cause capital outflows from Jamaica and a faster pace of exchange rate depreciation if domestic monetary policy is not properly aligned.
The MPC also agreed to continue pursuing other measures to contain Jamaican dollar liquidity expansion and to maintain relative stability in the foreign exchange market.
The BOJ said, from October 2021 to date, the Bank, while maintaining a flexible exchange rate, has taken strong actions in the foreign exchange market including an adjustment to the Net Open Position limits for deposit-taking institutions (DTIs) and the sale of foreign exchange to the market, when necessary, while continuing to ensure that the gross reserves remained comfortably above the level considered adequate.
“These policy actions contributed to the maintenance of stability in the foreign exchange market and, without them, imported inflation and hence the final prices faced by consumers would have been higher,” the BOJ said.
In the meantime, the MPC will continue to closely monitor the global and domestic economic environment and is prepared to pause its monetary policy tightening if the incoming data continues to reflect a downwards track for inflation.
As at August 16, 2022, Jamaica’s gross reserves amounted to US$4.3 billion, which represented approximately 124 per cent of the projected IMF’s Assessing Reserve Adequacy (ARA) measure for FY2022/23.