Global and local inflation continue to weigh heavily on Jamaica’s economic recovery from the impact of the COVID-19 crisis, Keith Duncan, co-chair of the Economic Programme Oversight Committee, said yesterday in his review of the country’s Economic Reform Programme for the period April – October 2021.

“If we are to really pull out the highlights and what are the threats that we see for Jamaica at this time, it would be inflation and the COVID-19, which remain significant and high,” the EPOC co-chair said in his opening remarks.

In commenting on inflationary expectations, he said that price increases will continue to exceed the 4.0 per cent-6.0 per cent target set by the Bank of Jamaica (BOJ), capping between 8.0 per cent and 9.0 cent over the next 10 years, before falling back within range in the next financial rate. To mitigate the impact of inflation, he said, the BOJ has indicated the possibility of another interest rate increase.

While noting that “inflation looms large”, Duncan pointed out that the BOJ forecasts that for financial year 2021/22, inflation rate will reach 8.2 per cent, based on its survey of Business Inflation Expectations conducted in October this year. A similar survey conducted in August had indicated that the value of goods would increase at a rate of 7.4 per cent.

“So businesses expect that inflation will continue to increase, driven by possibly the movement in the exchange rate and increased prices that we’re seeing from shipping, logistics, etc, as well as commodity price increases,” he explained, adding that these, in turn, has a negative impact on local transportation costs, utilities, and processed food prices.

Point-to-point inflation jumped from 5.0 per cent in October 2020 to 8.5 per cent in the period under review.

In outlining the central bank’s strategy to tackle inflation, Duncan said the BOJ has no control over the external shocks that contribute to price increases but “has taken strong monetary policy action” and is “working hard” reduce its “second-round” effect on local consumers. Among the measures, he said the central bank will monitor foreign exchange activity “to ensure that movement in the exchange rate do not threaten the inflation target.

In addition, he said the bank’s policy rate increase should encourage saving in Jamaican dollar while making loans more expensive, as well increasing the attractiveness of local investments compare to US-denominated assets. The move should also reduce demand for foreign exchange

However, Duncan pointed out that by increasing the interest rates, the Bank of Jamaica had created a “conundrum” for the Government, which will be paying higher interest payments on bonds. He added that a reduction in local demand of goods could also translate into lower tax revenues.

“Jamaica now faces a complex set of macro-fiscal scenarious in the complex balance of living with COVID-19 along with the knock-on effects of inflation,” Duncan emphasised, adding that the situation requires the “astute” management of the BOJ and the Ministry of Finance and the Public Service.

When asked about the possible impact the Omicron variant and an impending fourth wave surge in COVID-19 cases will have on inflation, Duncan stated that EPOC had observed that such an occurrence usually resulted in disruptions in the global supply chain and international inflation that had an impact on local prices.

He added that while the BOJ and the International Monetary Fund have forecast between 3.0 per cent and 4.0 per cent growth for Jamaica, inflation was a factor that the Government needs to take into consideration.