THE Bank of Jamaica says it’s in a race to head off inflation expectations becoming a self-fulfilling prophecy that could then result in price increases getting out of hand.

Richard Byles, governor of the Bank of Jamaica, told Parliament’s Standing Finance Committee yesterday that while “the macroeconomic outlook remains generally positive” as the third wave of the novel coronavirus outbreak recedes, the BOJ’s main concern “has been the recent inflation performance and inflation outlook”.

Inflation since August has seen a sharp uptick, reaching 8.5 per cent in October — the highest it has been since 2013 — forcing the central bank to take actions to curtail it, including increasing interest rates for the first time in 13 years at the end of September.

The worsening inflation has been driven by external factors such as higher shipping costs and the rising cost of commodities such as grains and fuel. According to Carey-Anne Williams, division chief with responsibility for monetary policy formulation at the Bank of Jamaica, “shocks” were responsible for 44 per cent of the inflation Jamaica recorded at the end of October.

The worry is, however, that consumers facing rising grocery bills will seek to increase prices for goods and services which have nothing to do with imports.

“Those aspects will drive an increase in inflation expectations, which results in firms increasing prices to recover,” she continued before adding that it could spill over into workers demanding higher wages, which itself will then feed back into higher inflation.

“The objective of the BOJ is to slow that down,” Byles told the committee.

“When it is a fact that goods have landed on our shores and they are more expensive, there’s nothing anyone can do about that. But it’s the expectation that the next set of goods that are coming on our shores will be much higher….so you’re saying that if everything is going up then I must put up my price too,” he continued.

He outlined it is that expectation and the desire to control it before it spirals out of control which caused the BOJ to raise interest rates twice, in the last two months, to a three-year high 2 per cent, and said “the bank is also prepared to consider further increases in the policy rate and could intensify the accompanying measures at subsequent policy meetings” to bring inflation back within the target range of 4 to 6 per cent “in the shortest possible time”.

Expectations here refer to the rate at which people expect prices to rise in the future. The BOJ ascertain these expectations using two methods – one a direct survey done eight times per year in which managers across various industries are asked what rate they believe inflation will be in the next 12 months and the responses recorded. The latest result from that survey showed managers expected inflation to be 8.2 per cent in the next 12 months.

The other method of measuring expectation is to examine how the market behaves by analysing the yield curve on government bonds based on their maturities. Typically, when the market’s expectation of inflation changes, nominal interest rates will tend to adjust and that adjustment is used to estimate the inflation expectations.

In the future, the bank said it will aim to survey consumers to ascertain their views on inflation, since those may impact wage demands and consumption patterns which in turn impacts inflation.

That aside, Byles admitted to the committee that the BOJ’s action to raise interest rates, “will cause market-based interest rates to rise, which will make savings more attractive — relative to spending — and make borrowing in Jamaican dollars more expensive.”

In addition, he said the measures are also intended to temper the demand for foreign currency and moderate the pace of depreciation in the exchange rate.

“They will also reduce demand in the economy and with it, the ability of businesses to pass on price increases to consumers,” he stated.

However, higher interest rates to control inflation apart, Byles told the committee he is concerned “that new variants and a fourth wave [of the novel coronavirus outbreak in Jamaica] could hamper the recovery, though expectations of growth remains in the range of 7 to 10 per cent with the risk skewed to the downside”.

“Our actions are designed to protect the welfare of all 3 million Jamaicans and not just that of any particular interest group or sector,” he concluded.