The Bank of Jamaica (BOJ) indicated that continued and rising demand for the US dollar is connected to investment, which it concludes is a good thing.

The opinion was given by central bank governor Brian Wynter during his address to the Public Administration and Appropriations Committee (PAAC) of Parliament on Wednesday.

In his scripted address, the Governor noted that while there have been concerns in recent times about the movement of exchange rate, “the more recent movements of the dollar appear to be related to increased investment activity, which is a good sign”.

For the fiscal year to 14 October 2016, the exchange rate depreciated by 5.6 per cent, compared with 3.9 per cent for the same period in the previous fiscal year. The fastest pace of movement in the Jamaican dollar over this period occurred in April 2016 (0.9 per cent) and May (1.8 per cent), with subsequent movements being slower.

On Wednesday October 19, the dollar was valued at $128.91 to US$1.

Wynter stated in his PAAC address that despite the movement in the exchange rate, inflation has remained low as the pass through from the exchange rate to domestic prices has been falling.

Further, he said, the BOJ was certain that the dollar was now fairly valued.

“Especially in a context of a current account of the balance of payments that is now in surplus after deducting imports funded by FDI, (foreign direct investment) Bank of Jamaica is of the view that the dollar is fairly valued and that the rate of depreciation in the first two months of the fiscal year was excessive and not supported by prevailing economic conditions at the time. There was no shortage of foreign exchange,” he noted.

Wynter explained that the pressures in the foreign exchange market in the early part of the fiscal year were largely influenced by specific large transactions in the capital markets and that, in order to ensure orderly conditions in the market, the bank intervened where necessary, selling approximately US$475 million over the first six months of the fiscal year, compared with US$465 million in the same period of the previous fiscal year.

The Governor remained upbeat on inflation in the medium term, noting that for September 2016 inflation was 0.5 per cent, which took annual inflation at September to 1.9 per cent.

“This is slightly above the record 1.8 per cent for both August 2016 and September 2015, but much lower than the 9.0 per cent at September 2014.

Wynter noted that while some have expressed the view that the fall in inflation is due entirely to the global drop in oil prices, the measure of inflation excluding oil would mean inflations has fallen steadily to 2.3 per cent at September 2016, relative to 4.5 per cent last year and the 8.5 per cent for the previous year.

“Looking forward, inflation for FY2016/17 is expected to be within the bank’s target range of 4.5 per cent to 6.5 per cent,” he stated.

Wynter said the low inflation environment was coinciding with higher growth and job creation.

“Gross domestic product (GDP) grew by 1.4 per cent in the June 2016 quarter,up from an average of 0.8 per cent for the previous two quarters. In line with the increasing growth momentum in the economy, Jamaica added on a net basis more than 40,000 new jobs by April 2016 compared with a year earlier.”

He predicted that economic growth will strengthen further over the medium term, driven by initiatives in mining, energy, ports, tourism, construction, communication, BPO, agriculture, and manufacturing.

“Low inflationary expectations coupled with relatively stable international commodity prices should result in inflation of 4.5 per cent to 5.5 per cent in the medium term,” he said, also predicting that the current account deficit should remain at sustainable levels.