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Inflation falling back in line, despite price pressures

The Bank of Jamaica is forecasting that inflation will align with the target range for the December quarter and be maintained up to the period ending March 2024.

But BOJ Governor Richard Byles is also warning of possible temporary upward pressure on prices that could show up in the next two quarters ending in September 2023.

“Inflation is projected to average 4.0 to 6.0 per cent by the December 2023 and March 2024 quarters; which is lower than the average inflation rate projected for the June and September 2023 quarters,” Byles said at his quarterly briefing on monetary policy.

The uptick in inflation is expected to rest at 6.3 per cent, Byles said on Monday.

Annual inflation is currently back within the target range, at 5.8 per cent as of April, the lowest it has been since July 2021.

Amid the improvement, BOJ is projecting economic growth of 3.5 per cent to 4.5 per cent for the quarter ending March 2023, while growth for the full fiscal year is estimated at 4.0 per cent to 5.5 per cent, in line with the range previously forecast by the bank.

However, for fiscal year ending March 2024, the central bank is forecasting a moderation to between one and three per cent growth, driven largely by the Jamalco alumina plant coming back online and improved output from the manufacturing and agricultural sectors.

Byles said risks to the inflation outlook are balanced, but noted that pressures would come from higher-than-projected future wage adjustments, a stronger-than-anticipated impact of climate change on domestic agricultural prices, and a worsening in supply chain conditions could put upward pressure on inflation.

And, higher-than-projected interest rates among major developed economies could worsen the interest differential, put pressure on the exchange rate, and contribute to higher inflation in Jamaica, he said.

BOJ has maintained its policy interest rate at 7.0 per cent since last November, amid falling inflation. Additionally, the American central bank, the Federal Reserve, has been slowing the pace of monetary tightening and has signalled that its rate hikes are at or near their peak.

Byles said the key external drivers of inflation – the price of grains, fuel and shipping – continued to decline as of April, while inflation expectations are also tracking downwards. The global forecast is for a continuation of the fall in commodity prices.

Weaker-than-expected global growth that could negatively affect domestic demand, and some projected adjustments to regulated prices that may not materialise, were identified as factors that could lead to lower-than-projected inflation.

“Notwithstanding the good news today, there is a risk of inflation again breaching the target temporarily before firmly being anchored in the 4-6 per cent corridor,” Byles said.

“Adjustment to selected regulated prices such as the national minimum wage, recent increases in the cost of communications services, seasonal increases in the price of agricultural products, as well as pending increases in the price of other regulated prices, such as transport costs, could lift inflation back above the target range over the next three or four months,” the central bank governor warned.

As for the central bank’s posture on interest rates, Byles said the BOJ Monetary Policy Committee has recommended that the current stance be maintained.

“The committee was satisfied that its monetary policy actions since October 2021 have been effective in achieving their objectives, but noted the need to maintain the policy stance until inflation is firmly contained within the 4.0 to 6.0 per cent corridor,” Byles said.

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