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BOJ holds firm on rates, projects growth of at least 4%

The Bank of Jamaica, BOJ, has held its key interest rate steady at 7.0 per cent for a third time, a decision that businesses have welcomed.

The central bank’s last rate increase was in November when the Monetary Policy Committee, MPC, had tacked on 50 basis points to the overnight rate that the central bank apply to funds deposited at the BOJ by banking institutions.

The BOJ had previously signalled restraint on future interest rate hikes in February, when it also opted to keep the rate unchanged. Instead, it announced a clamp down on bank cash through increases in the cash reserve ratio, which are due to take effect on April 1.

The reserve ratio for foreign cash will rise to 14 per cent, and to six per cent for domestic cash. Both have been adjusted by one percentage point.

Banks and other lending institutions use the BOJ’s policy rate as a guide to determine the interest paid on deposits and the rate charged on loans.

For businesses, the rate hikes have meant a rise in the cost of capital, which impacts their cost of doing business.

“I think it is a positive move,” said Metry Seaga, president of the Private Sector Organisation of Jamaica, PSOJ, in reaction to the MPC’s decision on Wednesday to hold the rate steady.

“There are levers that the BOJ has to pull and push to keep the very delicate balance in our economy. As the PSOJ, we are happy with how the policies are being managed,” Seaga said.

The BOJ is forecasting that for the fiscal year ending March 2023, the Jamaican economy will see growth within a range of 4.0 to 5.5 per cent.

The fiscal forecast includes an estimate of 3.0 to 4.5 per cent growth for the December quarter, which the central bank said was driven by tourism, manufacturing and agricultural activity; and an anticipated expansion of 4.0 to 5.0 per cent for the March quarter.

JMMB Bank CEO Jerome Smalling says the MPC decision is an indication that the central bank has its finger on the pulse of the Jamaican economy.

“I welcome that news, and I suspect that they are informed in terms of what is happening in the market and what further adjustments could potentially result in,” Smalling said.

In a release, the MPC said the decision to hold the policy interest rate at 7.0 per cent was in a bid “to maintain tight Jamaican dollar liquidity and to continue fostering relative stability in the foreign exchange market”, while making reference to the impending adjustment to the cash reserve policy.

Its decision was released amid falling headline inflation, which was down to 7.8 per cent in February, and core inflation, which decelerated further to 6.6 per cent.

The central bank continues to hold to its forecast that inflation could return to its target range, 4.0 to 6.0 per cent, by the December quarter.

John Mahfood, president of the Jamaica Manufacturers and Exporters Association said the central bank’s holding pattern was “the right move, given the very low inflation rates reported in the last four months, and the fact that the moving average inflation rate is getting close to their target range”.

“In fact, the inflation rate is coming down at a faster rate than their earlier prediction,” Mahfood added.

In its rate decision, the BOJ cited the slowing pacing of monetary tightening by the central bank of the United States, the Federal Reserve, which hiked rates again two weeks ago, but at the staid pace of 0.25 percentage point to a range of 4.75 to 5.0 per cent. It’s seen as a sign by the MPC that interest rates in the US may be near their peak.

Mahfood agrees that US interest rates may be plateauing.

But one financial analyst is sounding a note of caution.

Assistant Vice-President, Investment Strategy & Portfolio Advisory at Barita Investments Limited, Richardo Williams, said pundits are pointing to the cumulative effects of the US policy rate hikes as a potential cause of recent banking turmoil there, and that there may yet be unknown pockets of financial fragility that could implode.

“We must be reminded, however, that while some disinflation has set in, both the BOJ and the Fed have essentially reserved their right to continue hiking should inflation resume an upward trajectory,” said Williams.

“So, for us, while the decision is welcomed news, it’s not yet time to get comfortable,” he said.

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