The Bank of Jamaica (BOJ) is facing more backlash for its recent decision to increase its benchmark interest rate by 100 basis points — the latest criticism coming from the Private Sector Organisation of Jamaica (PSOJ). The entity, in a scathing media release yesterday, chided the central bank’s move to hike its policy rate from 0.5 per cent to 1.5 per cent on October 1, saying it “presents a risk to Jamaica’s medium-term economic growth prospects”.

Keith Duncan, president of the PSOJ, said while he understands the bank is spooked by a trend of inflation building “with core inflation moving from 3.4 per cent to 7.8 per cent in a year [and] is also concerned about all the liquidity in the system” joined the chorus of those not seeing eye to eye with the BOJ’s interest rate hike decision.

“Any movement in interest rate upwards is going to have a dampening effect on the economy. It’s going to slow down investment decisions and slow down consumer spending and also affect motor car purchases and mortgages because the cost of borrowing is going to go up,” Duncan told the Jamaica Observer in a short interview yesterday. He added, “any private sector interest would be concerned at the 100 basis points increase at this time.” His stance is similar to that of the Jamaica Manufacturers and Exporters Association (JMEA) which slammed the move earlier this week as “misguided” before adding that it will “further impoverish the most vulnerable in our society.” Economists — Dr Adrian Stokes at Scotiabank, Jermaine Burrell at JMMB and Dr Andre Haughton at the Department of Economics, UWI, Mona — signalled ahead of the rate hike that it would be a wrong move while the economy remains “soft”.

The BOJ hiked its key interest rate after seeing inflation, which it wants to keep in the four per cent to six per cent range, overshooting that target in August, reaching 6.1 per cent. It had also signalled it could raise rates further at its next Monetary Policy Committee (MPC) meeting on November 16, saying “subject to inflation and other macroeconomic data evolving as projected,” it will “continue to reduce the level of monetary accommodation at subsequent policy meetings by increasing the bank’s policy rate.”

However, the PSOJ, through its Economic Policy Committee, urged the central bank to excercise “caution in respect of transitory inflation” in hiking rates further and even called on the bank to “expressly clarify the specific economic circumstances that would give rise to further changes in the policy rate [while] continuing to assure the country that it stands ready to utilise effective policy tools to head off embedded inflation should that need arise.” The BOJ, in releases in August and September, said the higher inflation it was seeing is “transitory”, meaning it expects large price increases to last a short time. The major issues pushing up inflation in Jamaica now are higher international commodity prices and shipping costs while there are genuine concern from the central bank that agricultural commodity prices locally could increase as a result of the passage of tropical storms Grace and Ida in August 2021.

Still the PSOJ said it “is of the view that there is basis for concern that the now tighter monetary policy stance — in the context of adverse macroeconomic conditions arising from the COVID-19 pandemic, the Government’s programme to maintain a fiscal surplus, and uncertainty among economic actors about short term price changes due to supply chain issues — presents a risk to Jamaica’s medium-term economic growth prospects.

It pulled on the International Monetary Fund’s (IMF) view on the matter in a preview of the World Economic Outlook to be released on October 12, 2021, which notes “recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches. Inflation is expected to return to its pre-pandemic ranges in most countries in 2022 once these disturbances work their way through prices, though uncertainty remains high. Elevated inflation is also expected in some emerging market and developing economies, related in part to high food prices.”

The IMF went on to add that “central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics.” It outlined that “clear communication from central banks on the outlook for monetary policy will be key to shaping inflation expectations and safeguarding against premature tightening of financial conditions. There is, however, a risk that transitory pressures could become more persistent and central banks may need to take preemptive action”.

The PSOJ pointed out that it “endorses the view of the IMF and encourages the BOJ to utilise its unquestioned credibility to lead a communication effort that more directly emphasises for all economic actors the transitory nature of the inflation we are experiencing. The lobby group also said it stands ready to cooperate with the BOJ and other stakeholders in this regard”.