The Bank of Jamaica (BOJ) today announced its Monetary Policy Committee’s (MPC) unanimous decision to keep the policy interest rate, which is offered to deposit-taking institutions (DTIs) on overnight placements, at seven per cent.
The committee’s determinations were based on their assessment of recent developments, including a significant reduction in inflation over the past few months, which were generally positive. However, risks to the inflation outlook still lingered.
Jamaica experienced an annual headline inflation rate of 6.1 per cent in May 2023, surpassing the central bank’s target range but significantly lower than the 10.9 per cent recorded in May 2022.
Core inflation, excluding food and fuel prices from the Consumer Price Index, stood at 4.2 per cent in May 2023, well below the 9.7 per cent registered in May 2022.
Consequently, the MPC’s decisions aimed to steer Jamaica’s inflation rate towards the target range of four to six per cent.
The MPC’s decisions were underpinned by several pieces of information and assessments.
External drivers of headline inflation, such as grain, fuel, and shipping prices, continued to decline, while inflation expectations trended downward.
As anticipated, the United States Federal Reserve Board paused its monetary tightening in June 2023 but hinted at potential future interest rate hikes.
The MPC acknowledged the generally positive incoming data but cautioned that the inflation uptick above the target range was likely to persist in June and throughout the third quarter of 2023.
This increase is expected to be driven by recent hikes in telephone and internet rates, the national minimum wage, seasonally higher agricultural prices, and upcoming regulated price increases in transportation.
Based on global consensus forecasts of further declines in certain commodity prices and the BOJ’s overall monetary policy stance, inflation is projected to decelerate to the target range by the fourth quarter of 2023, assuming a decrease in inflation expectations alongside declining import prices and the continued impact of previous domestic monetary policy actions in curbing inflation.
Despite the agricultural sector being impacted by drought conditions, the BOJ said Jamaica’s economy continues to grow.
Gross domestic product (GDP) for fiscal year 2022/23 is estimated to range between four to five per cent, aligning with the Bank’s earlier projections. GDP growth for fiscal year 2023/24 is anticipated to moderate between one to three per cent.
In its review of the impact of previous monetary policy decisions, the MPC observed a general decline in inflation as well as a relatively robust, delayed pass-through effect of its policy rate on interest rates in the domestic money and capital markets, as well as on term rates offered on DTI deposits.
In April 2023, term rates on DTI deposits rose by an additional 22 basis points (bps), while borrowing rates for Primary Dealers increased by 3 bps. The DTI sector also made minor adjustments to rates on savings deposits and loans, including mortgages.
The risks to the inflation outlook remain balanced.
