The Bank of Jamaica (BOJ) has increased policy interest rates by another 50 basis points (bps) to 7.00 per cent, effective Monday, as it continues its drive to curtail runaway inflation.

The decision comes following the central bank’s Monetary Policy Committee (MPC) meeting last Wednesday and Thursday to deliberate on the appropriate response to inflation rising in October 2022 to 9.9 per cent, exceeding the 9.3 per cent reported in September.

This is the highest the central bank’s interest rate has been since February 2011 when it topped 7.25 per cent.

Central Bank Governor Richard Byles, in explaining the decision of the MPC, said, “While some of the key drivers of headline inflation, such as grains and shipping prices, continue to trend downwards on the world markets, we are not yet seeing the full pass-through to domestic food prices. In addition, core inflation, which excludes the impact of fuel and food prices, at October remained persistently high at 9.0 per cent.”

In addition, the decision aims to curb demand for foreign exchange (FX) and foreign exchange-denominated assets as Jamaica’s trading partners also took monetary tightening action to temper inflation.

Of note, Byles pointed to the US Federal Reserve (The Fed) increasing its interest rate by 75 bps. This, he said, could result in capital outflow from Jamaica and a faster rate of exchange rate depreciation.

In response, the MPC indicated that it “will continue to contain Jamaican dollar liquidity expansion and to maintain relative stability in the FX market”, which includes selling foreign currency when necessary.

“Without these actions, imported inflation and hence the final prices faced by consumers would have been much higher. The bank’s strong international reserves reinforce its ability to support the foreign exchange market as needed,” Byles said.

“The bank’s policy actions were expected to cause interest rates on deposits and loans to rise further, making saving in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive. They are consequently expected to help to reduce the demand for foreign currency, underpinning a more stable exchange rate and hence lower inflation,” he explained further.

Still, the BOJ said that it will pause the increase in policy rates going forward as it anticipates that it will begin to see the impact in deposits and loans. Since October 2021 the central bank has raised interest by 6.50 per cent after nine rounds of MPC meetings.

Moreover, the bank anticipates that consumers will begin to see the second-round effects of falling international commodity prices, in particular food and fuel, in the local market in the near term.

For the remainder of the calendar year the bank forecasts inflation will fluctuate between 9.5 per cent and 10.5 per cent, given there are no additional economic shocks.

“Consistent with consensus forecast for a fall in commodity prices and the bank’s overall monetary policy stance, inflation is projected to decline from these levels in early 2023 and fall within four per cent to six per cent by December 2023,” the governor stated.

When quizzed about the possibility of Jamaica entering a recession, he pointed to the BOJ’s projection of gross domestic product (GDP) growth between 2.5 per cent and 4.5 per cent with the service industry, especially tourism, and agriculture being major drivers. He added that even without tourism and remittance, “GDP remains robust”, considering the resumption of production at Jamalco alumina plant.

Responding to a question on the demand for US dollars going into the Yuletide season, Byles shared that such demand is usually counterbalanced by the inflow of tourism dollars in the winter season. Additionally, Deputy Governor Natalie Haynes explained that demand for US dollars usually begins to rise before Christmas and tapers off in mid-December.

On another note, the BOJ governor said he expects the Government’s increase in public sector compensation will have an impact on aggregate demand. However, he said the impact on inflation will depend on if the private sector will follow suit.

“Monetary policy actions to halt inflation cannot be painless for all parties. However, the greatest pain of all is the impact of inflation on the ability of the working population to afford the basic necessities of food, transportation and housing. In this regard, I wish to reaffirm the Bank of Jamaica’s commitment to doing all that it can to control inflation,” Byles said.

“The bank will continue to closely monitor the global and domestic economic data with the expectation that we will see more of the effects of our policies,” he said.