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BOJ anxious about tight jobs market, urges wage restraint

In the face of a tight labour market, the Bank of Jamaica, BOJ, is wary of the potential effect on prices.

Specifically, BOJ Governor Richard Byles is hoping that companies won’t resort to large wage increases, saying it would put upward pressure on inflation.

In a central bank update on monetary policy on Monday, Byles said there was anecdotal information regarding “wage adjustments in selected private-sector industries, which indicate that the domestic labour market is very tight.”

It comes amid a decline in the unemployment rate, or UER, to new lows of 4.5 per cent. At that rate, by global standards, Jamaica is considered to be at full employment.

Headline inflation was estimated at 6.6 per cent in July, while core inflation, which excludes food and fuel prices, was at 5.2 per cent. Consumers prices are down five points from their peak of 11.8 per cent in April 2022, while core inflation is three points off of the 8.4 per cent outturn that same period.

Consumer prices have sufficiently stabilised for the central bank to continue its policy of restraint. Last Friday, it opted again to leave interest rates unchanged at 7.0 per cent, a rate in effect since last November.

However, annual inflation is still performing outside the targeted band of 4.0 to 6.0 per cent.

“While the key drivers of headline inflation, such as grains prices, shipping costs and inflation expectations, continued to decline, there was exceptionally high agricultural price inflation in June and July, which reflected the impact of prevailing high temperatures,” the central bank has said.

In addition, there have been ongoing upward adjustments in the price of meals consumed away from home, while first-round effect of the increase in the national minimum wage was recorded in June.

In each of those two months, inflation was estimated at or above one per cent, and annual inflation ticked up as a result to 6.3 per cent in June and then to 6.6 per cent in July.

The BOJ expects a further uptick in inflation for the rest of the September quarter, driven by higher agricultural prices, higher education costs and wage pressures. However, its forecast for a return to the inflation target range of 4.0 to 6.0 per cent by December remains intact.

Still, that projection faces potential headwinds and could be derailed were there to be “higher-than-projected future wage adjustments in the context of the tight domestic labour market, second-round effects from agricultural price inflation, a worsening in supply chain conditions, and an elevation of world oil prices”.

As for the wage adjustments made by the Jamaican government, those have already been factored into inflation projections and aren’t a concern for the central bank.

“The government has done its major adjustments and those have passed through the system. The private sector is the sector we are concerned about, so that whatever adjustments are made, they are [to be] accompanied by productivity,” said Byles.

“If we do get large wage increases and those translate into increased prices, that will translate into an effect on inflation. Wage increases should be accompanied by productivity or not be significantly increased,” the central bank chief said.

Globally, an economy is considered to be at full employment when its UER is below five per cent. But while Jamaica’s labour force surveys are conducted by Statin, the agency says it does not make determinations on when the economy is at full employment. And responses from other entities were outstanding were outstanding up to press time.

However, in periods off low unemployment, employers have to compete to entice workers, or provide incentives to retain talent, while workers tend to demand higher pay, as is now happening in Jamaica.

Byles said that if private-sector wage increases were nominal, that is, kept within a range of six to seven per cent, the impact on inflation would not be significant.

“Beyond seven per cent, it needs to be accompanied by productivity; otherwise there will be a flow-through,” he said.

Meanwhile, Byles noted that the monetary policy tools wielded by the central bank have been doing well in controlling the exchange rate and liquidity, which themselves are two main inflation drivers that are within the BOJ’s purview.

Wage-push inflation, however, is not.

Byles, in response to questions, disclosed that it has cost the central bank about $20 billion to the policy rate increases and open-market operations. The policy rate is equivalent to the overnight rate that BOJ pays to banking institutions on their deposits.

“When rates increase to seven per cent, we have to pay that seven per cent to commercial banks for whom we hold reserves. There is also spending on open-market operations. In all, it cost $20 billion,” he said

However, he also noted that the central bank had robust foreign reserves, which were estimated at US$4.64 billion in July, down from US$4.78 billion in June.

“When we bring those into a profit and loss account, it more than compensates for the cost [of defending policy]. The Bank of Jamaica has been profitable ever since it became independent in April 2021, and we expect that this will continue,” the BOJ governor said.

BOJ has been averaging profit of $8 billion annually.

The recapitalisation of the BOJ when it became independent two years ago has helped in bearing the costs of its monetary stance, Deputy Governor Wayne Robinson added.

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