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BOJ warns of possible inflation breach given the expected spike

Latest projections indicate worsening economic contraction for 2020/2021

BY DURRANT PATE
Observer Business writer

Friday, November 20, 2020

The Bank of Jamaica (BOJ) is warning of a possible breach in the upper six per cent limited of its inflation target with rising prices expected to come in the December 2020 and March 2021 quarters.

At the same time, the BOJ is projecting a worsening economic contraction for 2020/2021 of 10-12 per cent, down from the originally projected 7-10 per cent. This worsening projection by the BOJ is indicative of the economic strain brought on by COVID-19 and adverse weather conditions.

Speaking at the bank's quarterly monetary press conference yesterday, Governor Richard Byles anticipated that consumer prices will rise over the next three quarters. For the current December 2020 quarter, inflation is projected at 5.5 – 6.5 per cent, exceeding the central bank's target of 4-6 per cent this fiscal year with the target being breached even further in the March 2021 quarter with the projected out-turn of 6.0 – 7.0 per cent.

WORSE THAN PROJECTED INFLATION

However, for the June 2021 quarter, inflation is expected to rise within the 4.0 – 5.0 per cent band. The worse than projected inflation out-turn is primarily underpinned by the impact of the recent heavy rains on agricultural supplies and prices, which is estimated to add approximately 1.0 per cent to the inflation forecast for the financial year (FY) 2020/21.

The bank's contraction prediction is also predicated on the assumption for increases in some regulated utility prices in the December 2020 and the March 2021 quarters which, if they occur, will contribute about 0.6 of a percentage point to inflation for the fiscal year.

“We again stress that these spikes will be temporary and wish to assure that, once we get through this blip, our forecast is for inflation to remain within target over the next two years,” Byles told journalists.

As it regards contraction in the economy, the news from the BOJ governor is not so good. According to Byles, “we expect that the worst is behind us with the June quarter contraction. Nonetheless, our latest projection for FY 2020/21 is for real economic activity to contract in the range 10 – 12 per cent, somewhat more than our previous projection of 7 – 10 per cent.”

PROJECTIONS FOR REBOUND

The BOJ is projecting that a partial rebound of about 3 per cent growth will commence in FY2021/22 and could possibly be as high as eight per cent if there is a strong recovery in tourism. However, the Jamaican economy is not expected to return to pre-COVID-19 levels before at least FY2022/23.

Governor Byles said that “despite the fallout in economic activity, the financial system has remained resilient throughout the pandemic. Our regular assessment of deposit taking institutions' (DTIs) balance sheets indicates that they are more than adequately capitalised and in compliance with prudent liquidity standards.”

He stressed that loan quality for the system, while naturally showing a small deterioration, remains well below the danger threshold. Specifically, the ratio of non-performing loans to total loans increased to 2.8 per cent in September 2020 compared with 2.4 per cent in September 2019, well below the benchmark of 10 per cent.

At the same time, DTIs' provisioning remains sufficient to withstand credit losses. Byles promised that the BOJ will continue to closely monitor the trends in loan quality given the heightened risks.

As it relates to the external accounts, Byles stressed that notwithstanding the fallout in tourism flows, the bank is expecting that the current account deficit of the balance of payments will remain at sustainable levels of 2 – 4 per cent of gross domestic product (GDP) over the next two years.

This is better than previously expected, supported by stronger than expected remittance inflows, a dramatic fall in imports as well as lower levels of private capital outflows. As such, the BOJ governor declared that “Jamaica's reserves remain healthy, with net international reserves at end October amounting to approximately US$2.9 billion.”

He pointed to the intervention measures rolled out by the BOJ over the past few months to cushion the financial sector from the impact of COVID-19 such as the provision of $76 billion (or about 4 per cent of GDP) in Jamaica dollar liquidity support to the financial system through various initiatives. These included a special bond-buying programme, a reduction in the cash reserve requirement and special bond repurchase facilities.

In addition, the BOJ provided liquidity support in the form of hard currency, which exceeded US$1.0 billion since March this year. The bank also offered US dollar-indexed bonds to investors seeking a hedge against exchange rate movements.

When asked by the Caribbean Business Report whether this liquidity support is sufficient or will there be a necessity for additional support, Governor Byles answered in the contrary. The BOJ governor pointed out that based on his assessment the support given is sufficient, explaining that most of the support took place in the earlier period of the pandemic with very little liquidity needed in these latter period.