The central bank is not joining the emerging school of economic thought that has floated the adjustment lowering of inflation targets as a realistic response to the current prolonged period of higher inflation.
The Jamaican monetary authority has chosen instead, to take aim at lowering expectations that prices will continue to rise, while ironing out kinks in the transmission of its more than yearlong monetary tightening into actual demand compression and a savings boost in the banking system.
Noting that the inflation target range is set by the government, based on its model and what rate is optimal for growth and tolerable in the economy, Bank of Jamaica Governor Richard Byles is holding to the central bank’s view that although inflation could remain elevated and above target of the next 12 to 18 months, the rate is expected to be corralled back to the 4.0 to 6.0 per cent target thereafter, barring any new global geopolitical upheavals.
BOJ Senior Deputy Governor Dr Wayne Robinson also said at a briefing earlier this month that an economy would be hard-pressed to function and grow at a sustainable pace, over a meaningful period, in an environment of high inflation.
“That’s why every central bank is now focused on trying to get the inflation rate back down, rather than trying to raise their inflation target,” said Robinson. “The key, first of all, is for us to try and tackle inflation expectations and if we can get back inflation expectations in line, then we should expect to see that inflation will eventually come back down.”
The central bankers have conceded that while inflation targeting, which the BOJ has been mandated to pursue by law, may carry a cost in the form of lower growth, the pain is expected to be short-lived.
The bank is taking credit for having reined in the depreciation of the local currency, thus dulling the additional negative impact a sliding Jamaican dollar would have on price increases. But it has also admitted that its anti-inflation policies, particularly its cumulative 6.5-point hike in the policy rate since September 2021, are not resulting quickly enough in higher lending and deposit rates in the banking system to help temper spending and encourage saving.
To address this, Byles says the BOJ is pursuing several initiatives aimed at unblocking monetary policy pass-through in the financial system.
“There are at least three channels through which we currently, and in the future, hope to impact the transmission system,” he said as he spoke to the most recent 0.5-percentage point increase in the policy rate to 7.0 per cent, effective November 21.
The first has to do with what he accepted would be a medium-term plan to create a central digital ‘know your customer’, or KYC, customer information database from which account holders can authorise the transfer of their personal information from one bank to another, thereby increasing portability in the system.
“Someone who is with one bank and wants to move to another bank finds it hard to do so with all of the KYC information that is required, which has to be done afresh. That is because the bank that you are approaching has to rely on its own due diligence, because if anything went wrong, they can’t blame the other bank for the due diligence that was done on the customer, so they have to do it all afresh again,” the BOJ governor explained.
While not being able to give a timeline for the activation of such a database, Byles said talks are ongoing with the banks to achieve it and other transmission objectives.
“The other thing that we find that is very useful is just discussion, dialogue with the banks. The commercial banks and the BOJ have a good relationship, and openness, transparency, making them know what we are trying to achieve and why we are trying to achieve it, goes a long way,” according to the central bank head.
He stopped short of naming a third initiative, which he said was on the cards.
“I would rather not say right now until we get further with it. But that is more near-term, and we hope to get that cracking by perhaps the first quarter of next year, and that will have some impact. It won’t cure the system, but it will have some impact,” Byles said.
In recent months, the central bank’s Monetary Policy Committee decisions have been critical of the slow pace at which the banking or deposit-taking institutions it supervises have been reacting to its policy signals. The central bank said it recognises that there will be a lag period between its policy moves and the manifestation of their effects on the banking system.
“The MPC reiterated its commitment to continue pursuing initiatives to address structural impediments to the monetary transmission mechanism,” the bank said in its latest rate decision.
The desired effect on compressing aggregate demand through loan rate increases, is also not necessarily borne out by the numbers from the most recently available BOJ credit conditions data to June this year, which showed that credit demand is growing.
“For the September 2022 and December 2022 quarters, lenders indicated that they expected overall demand for credit to expand. Increased demand is expected to reflect higher demand by individuals for credit and, to a lesser extent, increased demand by all businesses except large firms,” the BOJ-published report said.
The price of credit, although starting to rise on Jamaican dollar bank loans, was also heading in the wrong direction – down rather than up – on loans denominated in US dollars, with banks signalling for both categories, loan rate declines, rather than increases, later in the year.
“Based on the survey responses, average indicative interest rates on new local currency loans increased by approximately 31 basis points to 14.78 per cent during the review quarter relative to the previous quarter. The rates on new foreign currency loans declined by 30 bps relative to the previous quarter, bringing average indicative rates to 7.36 per cent,” the report stated.
Lenders had also indicated that they planned to to reduce interest rates on new local currency loans by 19 basis points to 14.59 per cent in the September quarter, and by a further 55 basis points to 14.04 per cent for the December quarter.
In its November rate decision, the central bank forecast that inflation, which is now at 9.9 per cent, would not return to its target range for another year, that is, sometime within the December 2023 quarter.
However: “The forecast assumes that the public’s expectation for future inflation will continue to fall,” the BOJ said.