THE Bank of Jamaica (BOJ) has raised its key policy rate for an eighth time since October last year, taking it to an almost 10-year high, but is already signalling that it “is prepared to pause” the rate increases “if the incoming data continue to reflect a downward track for inflation”.

On Thursday the central bank said its monetary policy committee (MPC) “unanimously agreed to further increase the policy rate by 50 basis points to 6.00 per cent.”

That is the highest BOJ’s policy rate has been since January 2013 when it was 6.25 per cent.

The Bank’s current decision has resulted in a cumulative increase in the policy rate of 550 basis points since October 2021, which has taken the policy rate to a level that the monetary policy committee tentatively considers to be appropriate.

The decision was arrived at after two days of meetings on August 16 and 17. The next meeting for a rate decision is scheduled for September 29. The BOJ’s MPC meets roughly every six weeks or about eight times per year.

While at its latest meeting the committee voted on another rate hike, the BOJ was quick to point out that it is encouraged by the direction of the last three inflation reports from the Statistical Institute of Jamaica.

“Having peaked earlier and lower than expected in April 2022, inflation at May and June were both 10.9 per cent, followed by 10.2 per cent at July. Declining international commodity prices, relative stability in the exchange rate and higher interest rates, have allowed for this trend. The Bank, however, believes that the conditions that led to these inflation outturns have not sufficiently solidified to ensure that inflation is sustainably on a downward path,” the central bank said in notes accompanying its rate decision.

It added that “there remains a risk of reversal”, in the inflation trend but outlined that its forecast is for inflation to fall within the target range of 4 per cent to 6 per cent by the December 2023 quarter — two quarters later than previously projected.

“Consistent with consensus forecast for a fall in commodity prices and the Bank’s overall monetary policy stance, and absent any new shocks, annual inflation is projected to range between 9 per cent and 11 per cent for the remaining months of 2022. Inflation is projected to fall to single digits in early 2023, as long as the conflict between Russia and Ukraine does not escalate and inflation among Jamaica’s trading partners continue to fall.”

It said it also expects the public’s expectation for future inflation will fall during the second half of 2022.

The Bank also decided to continue pursuing other measures to contain Jamaican dollar liquidity expansion and to maintain relative stability in the foreign exchange market.

Since October 2021 to date, the BOJ, while maintaining a flexible exchange rate, has taken strong actions in the foreign exchange market including the sale of foreign exchange to the market, when necessary.

“These policy actions have contributed to the maintenance of stability in the foreign exchange market and, without them, imported inflation and hence the final prices faced by consumers would have been higher.”

The central bank acknowledges that its actions are expected to cause interest rates on deposits and loans to rise further, making savings in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive. They are also expected to reduce the demand for foreign currency, leading to a relatively more stable exchange rate. The measures are also intended to constrain aggregate demand in the economy and, consequently, limit the ability of businesses to pass on price increases to consumers.

The BOJ also took note of the historically low unemployment rate in Jamaica, which at the end of April was 6 per cent, indicating that along with reported labour shortages in some sectors of the economy and any further price increases, “carry the potential for future wage adjustments to exceed that required for the consolidation of low, stable and predictable inflation”.