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BOJ softens tone on future hikes after new 7% rate decision

Lending rates are expected to continue on an upward trajectory as the central bank on Friday tacked on another half a point to its policy rate that influences interest rates in the banking system, where loan rates have tended to respond to policy actions more quickly and by larger margins than the rate paid on deposits.

The rate, which is equivalent to the interest paid by Bank of Jamaica, BOJ, for deposit-taking or banking institutions to ark funds at the central bank overnight, is now at 7.0 per cent, effective Monday, up 50 basis points from 6.5 per cent.

Interest-rate decisions are made by the BOJ Monetary Policy Committee, MPC, on a preset schedule. One more rate decision is scheduled for this year on December 20.

With the new hike, the central bank signalled in its decision released on Friday a possible easing of rate increases in the future if certain inflation-control conditions are met.

“After 12 months into its tightening cycle, the MPC therefore judges that it is appropriate to pause further policy-rate increases and to watch its pass-through effects on deposit and loan rates. This pause is also conditional on the MPC seeing more pass-through of international commodity price reductions to domestic prices and on the Fed (US Federal Reserve) not exceeding their targeted rate increase for 2022 and 2023,” the central bank said.

The MPC will again meet in December to review the inflation data and announce its policy response on December 20.

The BOJ says that despite the effectiveness of its inflation targeting actions, there is some risk that core inflation would remain high for a “protracted period” if inflation expectations, second-round effects from the commodity price shocks, and labour market pressures do not ease.

Inflation, it says, is expected to remain in the region of 9.5 per cent to 10.5 between November and December this year, with a projection for the rate of price increases to fall back within the 4.0 to 6.0 per cent target range by the December 2023 quarter.

“The forecast assumes that the public’s expectation for future inflation will continue to fall,” the central bank qualified in its outlook.

At September, inflation expectation as measured by a survey conducted by the Statistical Institute of Jamaica on behalf of the BOJ, showed that businesses expect inflation to track at 11.7 per cent over the next 12 months.

The BOJ has justified the latest rate hike, reasoning that while the key external drivers of headline inflation, such as grains and shipping prices, continued to trend downwards, it had not yet seen the full pass-through to domestic food prices. It has also flagged continued monetary tightening among Jamaica’s main trading partners, particularly in the United States where the Fed raised rates by 75 basis points and signalled further rate increases to come.

“This policy stance could cause capital outflows from Jamaica and a faster pace of exchange rate depreciation if domestic monetary policy is not aligned correctly,” the BOJ explained in its decision.

The most recent policy rate increase, will, as is customary, be accompanied by the continuation of measures to contain Jamaican dollar liquidity expansion with the aim of maintaining relative stability in the foreign exchange market. These include buying and selling foreign currency in the market as is necessary.

“Without these actions (by BOJ), imported inflation and hence the final prices faced by consumers would have been higher. The committee noted that the bank’s strong international reserves reinforces its ability to support the foreign exchange market, as needed,” Governor Richard Byles told a press conference at the bank’s offices in downtown Kingston that followed the monetary policy announcement on Friday.

He noted that one of the institution’s policy successes was maintaining relative stability in the foreign exchange market, pointing out that for the fiscal year to November 11, the Jamaican dollar depreciated by 0.5 per cent, compared to the 6.7 per cent depreciation recorded over the same period of the previous fiscal year.

Buoyed by what Byles described as the bank’s “substantial” gross reserves, which stood at US$4.3 billion at November 11, the BOJ governor said the central bank made a net purchase of US$552.6 million, having sold a total of US$833.7 million to the market and to select government bodies, over the period.

“The bank projects that the gross reserves will continue to remain adequate in the medium term,” he said.

The central bank head acknowledged that the bank’s policy action in pursuit of inflation control would continue to have negative effects.

“Monetary policy action to halt inflation cannot be painless to all parties. However, the greatest pain of all is the impact of inflation on the ability of the working population to afford the basic necessities of food, transport, and housing. In this regard, I wish to reaffirm Bank of Jamaica’s commitment to doing all that it can to control inflation,” Byles said.

The central bank has also declared that the financial system remains sound despite shocks caused by inflation and monetary tightening targeting price rises.

“Deposit-taking institutions’ balance sheets remain adequately capitalised and in compliance with prudent liquidity standards. The quality of DTIs loan portfolios remains stable, with the ratio of non-performing loans to gross loans showing improvement when compared to a year earlier,” Byles reported.

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