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BOJ leaves interest rate unchanged at 7.0%

The Bank of Jamaica held its policy interest rate steady for a second time at 7.0 per cent in its new decision released on Monday.

But the central bank is also tightening up on money supply, citing elevated risk from the drivers of inflation, including prospective wage increases amid a labour shortage. Banking institutions will now be required to hold the equivalent of at least six per cent of their Jamaican dollar liabilities as cash reserves, and 14 per cent of their foreign currency liabilities, starting April 1.

The prevailing cash reserve ratios, or CRR, are five per cent and 13 per cent, respectively.

The move is likely to impact borrowing costs as banks will have less cash to distribute as loans and will likely increase lending rates to compensate.

The upward revision of the CRR follows downward revisions of the domestic cash ratio, which the central bank said had been reduced from 12 per cent since 2019 amid stable inflation. BOJ has signalled that more revisions in the cash ratio are likely.

“In the absence of new shocks, future monetary policy decisions aimed at returning inflation to the Bank’s target range, including further adjustments to the cash reserve requirement, will depend on the state of liquidity in the financial system and the continued pass-through effect of monetary policy on deposit and loan rates,” it said.

Annual inflation decelerated to 8.1 per cent in January, while core inflation, which discounts food and fuel prices, also fell to 7.1 per cent.

“The key external drivers of headline inflation, such as grains, fuel and shipping prices, continued to decline and the forecasts for these variables have been lowered. Inflation expectations continued to track downward. In this context, consistent with global consensus forecasts for a fall in commodity prices and the bank’s overall monetary policy stance, and in the absence of any new shocks, inflation is projected to continue to decelerate in 2023,” the central bank said.

“The near-term risks to the inflation outlook are however elevated and skewed to the upside. In a context where the domestic economy continues to grow, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation. The projected level of liquidity in the financial system, if left unchecked, poses material risks to the achievement of the inflation target as well as to the maintenance of stability in the foreign exchange market,” BOJ added.

BOJ’s forecast for a return to its 4 to 6 per cent inflation target remains the December quarter.

The central bank is also forecasting a more rosy outcome for the Jamaican economy, saying its new estimate for growth is now within a range of 4.0 to 5.5 per cent, “exceeding the upper limit of the range previously anticipated” by the bank, and driven mainly by the recovery of tourism sector.

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