BANK of Jamaica (BOJ) has raised concerns that Jamaica’s inflation rate could fall lower than its projected inflation average of 4.3 per cent over the next two years.

The BOJ, in its quarterly monetary policy report published in February, projected that inflation would average 4.3 per cent over the next eight quarters before gradually approaching the Bank’s 5.0 per cent target in the medium term.

This forecast was mainly predicated on increases in domestic agriculture prices to more normal levels, an uptick in imported inflation caused by a moderate increase in crude oil prices and lastly, an improvement in domestic demand conditions resulting from the Bank’s accommodative monetary policy stance over the past 18 months.

But in an update on Wednesday, the Central Bank revised its assessment to suggest “that the risks to the inflation forecast have shifted to the downside — that is, inflation could be lower.”

“Inflation is now more likely to trend below the projected path, mainly due to expectations for a lower-than-projected pass-through of international oil prices to domestic energy costs. In addition, the prospect of favourable weather conditions could result in lower-than-anticipated increases in agricultural prices,” the Bank said.

It added that over the next two years, Jamaica’s projected GDP growth is likely to be lower than BOJ’s estimate of potential GDP growth.

“Growth prospects are heavily contingent on continued expansion in construction and mining, which both carry some downside risk. Global growth is also likely to be slower than previously anticipated over the period and could present a downside risk to domestic growth from weaker external demand,” the Central Bank said.

Nevertheless, the BOJ reasoned that real GDP growth could also turn out to be somewhat higher than previously anticipated, largely based on the impact of the recently announced fiscal stimulus.

“There have also been positive developments in private sector credit, which is likely to expand faster than previously anticipated. Commercial bank credit to the private sector expanded year-over-year by 18.6 per cent at January 2019, above the expansion of 14.4 per cent at December 2018.

“Other macroeconomic indicators continue to be positive. Foreign reserves remain above the level deemed to be adequate, market interest rates are low, the external accounts remain sustainable, labour market conditions are improving and fiscal performance is strong,” it said.

Annual inflation at February 2019, as reported by the Statistical Institute of Jamaica, was 2.4 per cent, relative to 2.3 per cent at January 2019, falling below the target set by the International Monetary Fund’s Precautionary Stand-by Arrangement inner band of 3.5 per cent and the BOJ’s target of 4-6 per cent.

In response, the BOJ on February 20th, announced its decision to lower its signal rate by 25 basis points to 1.50 per cent, aimed at increasing the rate of expansion in private sector credit.

“Meanwhile, all measures of underlying inflation at February 2019 continued to be low. This suggests that recent improvements in economic activity have not been sufficient to return inflation to the target as quickly as desired,” the BOJ said.

In its update on Wednesday, BOJ also announced a further reduction in its signal rate by 25 basis points to 1.25 per cent. The lowering of interest rate comes on the heels of BOJ’s reduction in the cash reserve requirement for deposit-taking institutions from 12 per cent to 9 per cent. The new strategy took effect March 1, 2019 and would have released $16.8 billion to the institutions, ultimately improving their ability to provide more credit to households and businesses at lower rates and on better terms.

—Karena Bennett