The Bank of Jamaica (BOJ) has announced that its Monetary Policy Committee (MPC) has unanimously agreed to maintain the policy interest rate at seven per cent, with inflation projected to rise above its target range between now and March 2025.
The BOJ says the rise is primarily due to the continued impact of the increases in selected public passenger vehicle (PPV) fares.
Without the effects of the PPV fare increase, it is estimated that annual headline inflation would have averaged 5.9 per cent during this period, the central bank noted.
“In the context of the positive trends in the key drivers of headline inflation, fairly stable core inflation and the expectation that the impact of the PPV fare increase will be temporary, the MPC decided to maintain the monetary policy stance,” it explained.
Jamaica’s annual headline inflation rate at November 2023 of 6.3 per cent was above the 5.1 per cent at October 2023 but much lower than the peak rate of 11.8 per cent recorded at April 2022.
According to the BOJ, the uptick in headline inflation in November was primarily driven by the impact of an increase in public passenger vehicle (PPV) fares announced by the Government.
However, the risks that inflation could be higher than forecasted are elevated.
These risks include second-round effects from the PPV fare increases, sharper-than-anticipated increases in domestic agricultural price inflation over the near term, and higher-than-projected future wage adjustments in the context of the tight domestic labour market.
Core inflation (which excludes food and fuel prices from the Consumer Price Index (CPI)) was 5.6 per cent at November 2023, generally in line with the average for the past three months and lower than the 8.4 per cent recorded at April 2022.
This trend suggests that core inflation is being contained, which bodes well for the longer-term inflation outlook. Moreover, the key drivers of headline inflation, such as international commodity prices and shipping costs, continued to decline, and the exchange rate has remained generally stable, given the monetary policy actions as well as strong tourism and remittance inflows.
Consistent with these trends, deposit dollarisation, which reflects the proportion of US dollar deposits to total deposits, continued to trend downward to its lowest level since December 2011.
“This positive trend reflects improving confidence in holding Jamaican dollars,” the BOJ said.
Meanwhile, commodity prices and international oil prices have trended below the bank’s forecast, mainly due to the weaker-than-forecasted impact of production cuts by major oil producers.
Average grain prices were also well below the bank’s forecast and are expected to remain below projections over the near term. Inflation in the economies of Jamaica’s main trading partners has also continued to decline.
A deterioration in supply chain conditions could also influence higher inflation. The main downside risks, which could lead to lower inflation, include the possibility that oil and grain prices could trend well below the forecast.
Other downside risks also include weaker-than-expected global growth, which could have a stronger-than-projected downward pull on domestic demand and imported inflation, resulting in lower levels of price changes.
Future monetary policy decisions will, therefore, critically depend on incoming data related to the strength of the potential risks to inflation noted above, the BOJ said.
The date of the next policy decision announcement is February 20, 2024.