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Samuel Braithwaite BOJ monetary policy: Is there a Byles effect?

On February 21, the Bank of Jamaica, BOJ, held its first monetary policy press conference for 2023. A day earlier the BOJ announced its intention to keep its policy interest rate unchanged at 7.0 per cent.

However, it was the BOJ’s decision to increase the cash reserve ratio, or CRR, on both Jamaican and US dollar deposits which drew much interest.

Increases in the CRR are meant to reduce the amount of money circulating in the economy by reducing the capacity of banks to make loans, and like increases in the BOJ’s policy interest rate, increases in the CRR are expected to put upward pressure on commercial bank interest rates to depositors and borrowers.

However, unlike BOJ policy interest rate changes, a change in the CRR is a BOJ policy decision which deposit-taking institutions are legally obliged to follow. Indeed, the BOJ’s 10 policy rate increases in 2021 and 2022 were not met with commensurate increases in interest rates by commercial banks.

Seven questions for BOJ

The following questions are for the authorities at the Bank of Jamaica. These questions are asked in good faith, recognising the hard work done by the BOJ during this most turbulent of times.

1. When the BOJ talks about people reducing consumption in favour of saving to earn higher interest rates, who are those people? Into which income bracket do they fall? It is reasonable to assume that those who have enough disposable income to save are in a minority and are already saving or investing a significant portion of their income.

Increased interest rates will likely lead to a rearranging of portfolios – equity markets have been struggling globally- as opposed to a decrease in consumption in favour of higher savings. Are consumers and firms as exuberant as Governor Richard Byles suggests, thereby driving up inflationary pressures?

Perhaps the long-expected cooling of the real estate sector might occur shortly; however, thanks to recent financial sector fraud could we see renewed interest in real estate investment, in place of stocks and securities, thus delaying the cooling of property prices. Additionally, the reluctance of commercial banks to follow the BOJ rate increases in lockstep would have reduced the probability and immediacy of a slowdown in the real estate market.

2. The BOJ has noted that its 10 policy rate increases are partly a response to the US Federal Reserve increasing its policy rate. To not act would place the Jamaican dollar under pressure. Why then was the policy rate lowered consistently between 2017 and 2019 at a time when the Fed was increasing its policy rate? Could this have contributed to the depreciation of the Jamaican dollar during that period?

3. During the period 2017-2019, was the BOJ fine with allowing the Jamaican dollar to materially depreciate? Indeed, currency depreciation could have contributed to pushing inflation up towards the target range of 4.0 – 6.0 per cent. World Bank data shows Jamaican inflation running just below 4 per cent in 2018 and 2019. Was the Jamaican dollar depreciation deliberately allowed, given the BOJ’s inflation-targeting mandate? Given the renewed, persistent and welcomed focus on exchange rate stability during 2022, is there a ‘Byles effect’ when one considers what was practised in the early days (2017-2019) of the BOJ’s inflation-targeting regime? I have listened to several BOJ press conferences chaired by Governor Byles, who assumed office in August 2019, and he skilfully walks the tightrope of speaking to exchange rate stability and the constitutionally mandated inflation target.

4. According to BOJ data, average commercial bank interest rates have not increased materially in line with its policy rate changes. How long is it likely to take for increases in the policy rate to cause significant increases in the interest rate of commercial banks? Aside from the costs (menu costs) involved in changing their rates, why have commercial banks been slow to react? What does this say about the transmission mechanism of domestic monetary policy? What does this say about the lag between policy rate increases and its impact on the real economy?

Would the BOJ argue that the inflation rate remains persistently above target because commercial banks have been slow to react to the BOJ’s policy rate increases? Alternatively, have the commercial banks done the prudent thing by not driving up interest rates? Surely, everyone with a mortgage would find it much harder to meet higher mortgage payments on top of the hefty increases in their food bills – increases that are often above the average inflation rate.

5. Is the BOJ concerned that without increasing its policy rate to 7.0 per cent, nominal wages would increase materially as workers demand more remuneration to pay for already-expensive goods? Are workers likely to be successful in their wage demands? Will firms buckle and pay significantly more? Can Jamaican firms afford to give their workers significant increases, thereby creating a wage-price spiral and de-anchoring inflation expectations in the process?

6. A BOJ survey conducted about a year ago shows that 62 per cent of the domestic firms surveyed are unaware of the inflation target, and 77 per cent are unaware of the point-to-point inflation rate. What does this mean for the efficacy of the BOJ’s efforts to fight the so-called second-round inflationary effects? Are domestic firms increasing their prices not only because of higher input costs, but also to make up for reduced profits during the height of COVID-19?

Surely, if a firm would like to charge higher prices, as they generally desire, a good time to justify doing so is when everyone is talking about inflation.

7. Fast-forward to December 2023, assuming no additional global shocks and domestic inflation returning to the target range, will the policy rate be lowered to the IMF’s neutral policy rate for Jamaica of 4 per cent or perhaps around half-way, 5 per cent, between the upper and lower bounds (2.6-7.6 per cent) of the BOJ’s range for the neutral rate? It is important to note that the BOJ has stated in its recent monetary policy report that it will review the monetary transmission mechanism to ensure that its monetary policy actions have the desired effect.

In closing, it is apropos to recognise the “clean bill of economic health” Jamaica received during its recent annual Article IV consultation, or check-up, by the IMF. This is all well and good, and is consistent with what we have become accustomed to hearing as regards the stewardship and performance of the Jamaican economy in recent years.

Perhaps the more interesting economic story for 2022 is that the Jamaican dollar appreciated against the US dollar between February 2022 and February 2023, at a time when about 90 countries around the world saw their currencies depreciating; 30 of them had a depreciation of at least 10 per cent.

Is there a Byles effect? Time will tell.

Samuel Braithwaite is a lecturer in the Department of Economics, University of the West Indies, Mona. Email:

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