Businesses expect inflation to spike again
Businesses expect inflation to hit 8.2 per cent by the end of this year, amid fears of rising utility costs and fluctuating interest rates, according to a new Bank of Jamaica survey.
The expectation exceeds the central bank’s target range of between 4.0 to 6.0 per cent.
“Respondents indicated that they expected the largest increase in production costs over the next twelve months to emanate from utilities, stock replacement, as well as raw materials, in that order. Despite recent public discussions of a tightening labour market, the wages and salary expense is still anticipated to be the least likely to increase,” the central bank said in the quarterly BOJ Survey of Businesses’ Inflation Expectation Report.
The quarterly survey was conducted for the bank by the Statistical Institute of Jamaica in May and June.
Annual, or point-to-point, inflation briefly fell back within the target band at 5.8 per cent in April, but was tracking at 6.3 per cent as of June. Essentially, businesses expect that the current upward trajectory will be sustained, and that the inflation rate will be nearly two percentage points higher by December.
The central bank, however, has a different view.
In late May, BOJ Governor Richard Byles said inflation was expected to trend downwards to the target range by year end, but had warned that temporary price spikes were likely in the July-September quarter. The BOJ previously indicated that its main concerns related to agricultural prices, household labour and communication costs.
That said, businesses think that inflation will temper in 2024. They expect inflation to decrease slightly over the next 12 months to 8.3 per cent in June 2024, a more optimistic outlook than the 9.6 per cent estimate that emerged from the previous canvass of businesses.
The price optimism was also reflected in a higher satisfaction rating about the control of inflation, with fewer respondents expressing dissatisfaction relative to the previous survey published in April.
Regarding currency expectations, respondents predict a consistent depreciation of the Jamaican dollar by 0.9 per cent in three months, 1.4 per cent over six months, and by 1.6 per cent within a year.
Interest rate expectations suggest an anticipated rise for the 90-day Treasury bill rate, which was projected to hit 8.3 per cent by September, marking a slight increase from 7.9 per cent, the report indicated. The T-bill auction in July yielded a rate of 7.79 per cent.
Despite these expectations, a majority of respondents forecast that the central bank’s policy rate would remain steady over the next three months. However, a considerable 17.9 per cent of the financial sector anticipates the rate will be marginally lower, marking an uptick from the previous survey at 13 per cent.
The BOJ started increasing interest rates in October 2021 from 0.5 per cent to its current level of 7.0 per cent as a means of curbing inflation, which hit a high of 11.8 per cent in April 2022. Higher interest rates can retard economic activity by making it more expensive to finance business activity and general lending, while making it more attractive to save, which in turn reduces spending.
Business sentiment appears strong, with both present and future business conditions expected to improve. Respondents expecting “better” conditions drove these increases, with the Present Business Conditions Index improving to 135.6 points from 128.3 points, and the Future Business Conditions Index rising slightly to 144.9 points from 144.2 points in the previous survey.