BOJ qualifies capital flight concern
The central bank is clarifying a concern about capital flight, which it raised months ago when it started raising its policy interest rate late last year as a decisive move against rising inflation that pre-empted the central banks of several large economies, including the United States Federal Reserve.
Some private-sector interests have continued to knock the Bank of Jamaica, BOJ, for the rate-rise monetary policy and have disputed the central bank’s arguments about possible capital flight from Jamaican to US investments, in response to higher interest rates in the North American country since March.
“The prospects of earlier and stronger monetary policy tightening by our major trading partners, notably the United States, may result in capital outflows which could cause pressures on the exchange rate if domestic monetary policy is not appropriately aligned,” BOJ Governor Richard Byles said at the bank’s quarterly monetary policy briefing in February, after the central bank’s Monetary Policy Committee ratcheted up the benchmark policy rate the BOJ pays on overnight deposits by 150 basis points to 4.0 per cent.
Now, BOJ officials are conceding that there has been no evidence of capital flight from the country, despite the Fed having raised rates four times so far this year and signalled further rate increases to come.
ON THE OFFENSIVE
The central bank, however, has gone on the offensive to make clear that its reference to capital flight does not only mean investments fleeing the country, but also investors shifting from Jamaican-dollar instruments to USD-denominated holdings.
“I can say clearly that I don’t have any capital flight concerns today, meaning that I see no evidence of it,” Byles declared at the most recent monetary policy briefing, following its eighth straight policy rate increase on August 19 to 6.0 per cent.
“Even when rates were low, we didn’t have capital flight, but what we did have – if we define capital flight as money running away from Jamaica – was money walking to a better investment possibility. And while it is not capital flight in the sense that domestic conditions were not running it away, it still was a drain and (put) some pressure on the exchange rate,” he added.
Private Sector Organisation of Jamaica vice-president and the chairman of its economic policy committee, Dr Adrian Stokes, has been among the most strident critics of the central bank policy.
“Capital will flee if capital deems a macroeconomic environment as unstable. Jamaica, in fact, has had negative real rates in local dollar terms for a couple of years, yet we did not see any capital flight out of the country. We did not see any undue pressure coming on to the exchange rate,” Stokes previously told the Financial Gleaner, in response to the BOJ’s initial capital flight concerns.
Byles has stuck to his guns on the rate hikes.
“What the new interest rates have done is make people stop and think (that) maybe there is an investment here in Jamaican dollars that is as good as, or maybe even better than, one in foreign currency. Low interest rates don’t mean that there will capital flight, but it also means that you run the risk of capital trying to find a better return elsewhere,” the central bank chief said this month.
“It is not to our interest to encourage that by keeping domestic interest rates were low. We have to be careful about investment assets abroad, or in foreign currency becoming far more attractive than in Jamaica. And what will happen is, people will go to the market with their Jamaican dollars and buy US dollars that puts pressure on the exchange rate, and they make their investment,” Byles added.
In this regard, he has maintained that the actions of the Federal Reserve are an important signal to the local central bank. Fed Chair Jerome Powell has said that US rates are likely to go further than the current 2.25 to 2.5 per cent – as high as 4.0 per cent some Fed board members have projected – and is likely to stay elevated for some time to bring US inflation, which was at 8.5 per cent in July, back in line with its 2.0 per cent target.
HELD IN US DOLLAR
While there might be no evidence of outflows of capital from Jamaica, BOJ Senior Deputy Governor Dr Wane Robinson says there has been a “dollarisation” trend, with more of the funds in the banking system being held in US dollars.
“If you look at foreign currency deposits in the banking system – deposit-taking institutions – many years ago, that was just between 20 to 30 per cent of their total deposit liabilities. Today, that fluctuates between about 40 and 45 per cent. A couple years ago it went even higher than that, to 50 per cent. So we have seen a trend, an increase in this preference … in this dollarisation,” Robinson said at the August briefing.
“If you look at the securities dealer sector, that dollarisation is even higher than what is in the banking system,” the central banker added.
The tight liquidity arising from the policy actions of the BOJ over the past several months, however, has helped to stabilise the situation, Robinson added.
He, too, is making the point that the capital flight that concerns the central bank is not limited to cross-border flows.
“When we are talking about capital flight, it is this broad preference for USD assets, foreign currency investments, whether they hold it here or abroad. It doesn’t matter where they hold it. Whether they hold it in Miami or they hold it at a bank or securities dealer in Jamaica,” he emphasised.
With domestic interest rate increases affecting only Jamaican-dollar investments, the central bank is also concerned about its monetary policy influence dwindling in the wake of investors bulking up on foreign currency holdings.
“Whenever you have a banking system that is so dominated by dollar liabilities, it does affect the transmission, because it means that BOJ monetary policy is only operating on a fraction of the liabilities in the banking system,” Robinson said.