Dear Editor,

Please allow me space to join the vociferous criticisms from the public and members of the Private Sector Organisation of Jamaica (PSOJ) in denouncing the move of the Bank of Jamaica (BOJ) to hike the central bank interest rate to a whopping five per cent in an effort to arrest inflation.

This, in my opinion, is the wrong strategy.

The function of the central bank is to employ monetary and fiscal policies to manage inflation and maintain the stability of the national currency and thus keep inflation in check.

I wish to educate the confused bureaucrats at the BOJ on the phenomenon of inflation and the types of inflation to determine the appropriate response to the current rise in prices in Jamaica.

The central definition of inflation is an increase in prices of goods and services over a given period of time in tandem with a decline in the value of the currency.

The basic price of a commodity is influenced by the supply and demand of that particular good or service. If the the good or service is in high supply the price will tend to fall, while a shortage of the good or service will tend to stimulate an increase in price, giving rise to inflation, which reduces consumption.

Therefore, the principal move to reduce prices is to ensure a steady supply of goods and services that are accessible to the consumers at the lowest production cost.

According to Investopaedia, there are three forms of inflation: demand-pull, cost-push, and built-in inflation.

Demand-pull inflation arises in a situation in which there is a shortage of goods and services, that is, the demand is greater than the supply, thus resulting in an increase in commodity prices; cost-push inflation emerges when there is increase in production costs which must be passed on to consumers; and finally, built-in inflation is driven by demand for wage increases which also must be recovered by increasing prices of goods and services.

Examination will reveal that Jamaica’s economic environment is typically characterised by all three forms of inflation.

Jamaica is a high consumer of imported goods, which increases the demand for scarce foreign exchange, which results in currency devaluation and increases in the price of consumer goods and raw material. A typical example is local agricultural products. Yam is being sold in Jamaica for $300.00 per pound due to low supply and high demand. One coconut is selling for $200.00. The cost of renting a house or office space is astronomical due to measly supply.

The current pandemic and the war in Ukraine are pushing up oil prices and, as a result, electricity and transportation costs have began to spiral upward along with other commodity prices. Additionally, both public and private sector employees are clamouring for wage increases, inevitably giving rise to runaway inflation.

The function of the central bank is to administer monetary policy, implement strategies to stabilise the value of the currency, and set interest rates to stabilise inflation.

Given the Jamaican scenario, we need to reduce the interest rate to facilitate investment and stimulate economic growth, thus increasing the supply of goods and services and reducing price and inflation.

I am calling on the Governor of the BOJ Richard Byles to cut interest rate to facilitate growth of the economy.

Dr JD Wood

jafnam@yahoo.com