IN his speech for the tenth anniversary of the Jamaica Securities Dealers Association (JSDA), Bank of Jamaica (BOJ) Governor Brian Wynter argued that the topic that he had been asked to speak about, “Securing Jamaica’s Financial Future”, was very timely.

The debt and fiscal sustainability challenges in the Euro area and the US had created an unusually uncertain external environment, compounded by concerns about food security driven by the shortage in grains due to bad weather in the producing countries, particularly the US.

Locally, he argued, there had been uncertainties since mid 2011 about the medium-term economic programme, particularly with regard to the status of our agreement and negotiations with the IMF. This had led to apprehension in the market about the continued adequacy of the net international reserves (NIR) in the context of the global uncertainty about prices, demand and capital flows.

He described the Bank of Jamaica as “sanguine” — the dictionary definition of which is cheerfully optimistic, hopeful or confident — about the current path of macroeconomic policy. This optimism stems from the “strong fiscal measures” outlined in the 2012/2013 Budget, which “decisively” demonstrates the Government’s commitment to fiscal and debt sustainability over the medium term.

Addressing the critical issue of the IMF agreement, he described the Government as moving “assiduously” to have an agreement before the end of the year, which would lead to an unlocking of official flows as well as provide a “fillip” to business confidence. The BOJ was therefore forecasting a gradual recovery in the NIR in the second half of the fiscal year.

He admitted that the recent tax measures in the Budget and the rise in international grain prices might have raised concerns about the BOJ’s inflation target, which had been revised upwards to 10 to 12 per cent (announced at a special press conference on June 14) from the previous six per cent to eight per cent after the presentation of the budget tax measures, which had been estimated at having an impact of 3.4 per cent for the fiscal year. The BOJ had predicted a temporary spike in inflation, to between three per cent to five per cent for the second quarter ending in June, and 2.5 per cent to 3.5 per cent for the quarter ending in September, with inflation normalising in the remaining two quarters of the fiscal year.

The inflation outturn has been much better than projected, at only 1.5 per cent for the quarter ended in June, followed by an even more encouraging 0.3 per cent decline in July, a clear contrast with the BOJ’s expected increase in prices. Whilst there were some increases in prices related to the tax package (these were however restrained by competitive pressures), the Governor noted the impressively “agile” competition in mobile which had led to a significant reduction in the cost of communications, and the further decline in utility rates. As a consequence inflation for the first four months of the fiscal year was only 1.1 per cent.

Going forward, the BOJ expects the main source of inflationary pressure to be from higher grain prices, and a moderate upward movement in oil prices mainly due to the European ban on oil imports from Iran. The BOJ also expects some pass through to inflation from the recent movement in the exchange rates (BOJ research suggests a one per cent decline in the exchange rate normally raise inflation by just under 0.6 per cent in the course of a year), although this will be constrained by relatively weak domestic demand.

In short, the Governor believes that the rate of price increases may fall well below the BOJ’s forecast range of 10 per cent to 12 per cent for fiscal year 2012/2013, and that inflation for the current quarter could be similar to the previous quarter, in the range of one per cent to two per cent.

He believes the upside risks to this forecast — higher grain prices and the impact of adverse weather in the still active hurricane season — are balanced by the downside risk of weaker than forecast external and domestic economic activity, with our current tight fiscal stance restraining domestic demand and therefore price increases.