BOJ pushes for increased spending

Tuesday, May 21, 2019

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DAYS after announcing a two percentage point reduction in the cash reserve requirement to 7 per cent, the Bank of Jamaica (BOJ) has announced plans to lower the rate offered on overnight balances by 50 basis points to 0.75 per cent per annum.

The reduction, which takes effect on May 20, 2019, is aimed at encouraging the local banks to lend more money, thereby stimulating higher economic activity in line with the inflation target.

“This decision reflects Bank of Jamaica's assessment that, while inflation is expected to increase to average 4.5 per cent over the next eight quarters, there will be months when inflation will fall below the lower limit of the Bank's target of 4.0 per cent to 6.0 per cent in the context of low underlying inflation,” the BOJ said.

BOJ's decision to lower the rate offered on overnight balances comes two months after the last decision to lower overnight balances was announced. At that time, the country's inflation dipped below both the Bank's and the International Monetary Fund's target.

Annual inflation at April 2019, reported by the Statistical Institute of Jamaica, was 3.9 per cent, up from 3.4 per cent at March 2019 and 3.2 per cent at April 2018. But while annual inflation has been rising, the Bank argues that underlying inflation remained low.

BOJ anticipates that inflation will rise towards the midpoint of the target by the March 2020 quarter as (i) domestic agriculture prices increase from the low levels of recent months to more normal levels and (ii) domestic economic activity increases in response to the lowering of the policy rate over the last eight quarters.

However, inflation is not expected to stay at the mid-point of the target but will decline towards the bottom of the target in the period after the March 2020 quarter and only return to the midpoint slowly over the ensuing three years. “This outlook carries a material risk that inflation will fall below the target again during that period in the absence of a policy response,” the BOJ said.

BOJ noted that the main upside risk, which could cause inflation to be higher than forecasted, is the possibility of higher-than anticipated crude oil prices. On the other hand, the main downside risks, which could cause inflation to be lower than forecasted, include better-than-anticipated production in the agriculture sector which could lead to lower food-price inflation. In addition, growth could be lower than projected if global trade tensions escalate.

The next policy decision announcement date is June 27, 2019.

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