THE Bank of Jamaica (BOJ) Friday said it will keep its key policy rate unchanged following a unanimous vote on the decision by its rate-setting monetary policy committee (MPC), citing it has been having “material success” in the fight to contain inflation. The decision means BOJ’s policy rate will remain at 7 per cent until at least the next meeting of the MPC, with the decision to be announced on September 29. It also said it will maintain tight Jamaican-dollar liquidity conditions and relative stability in the foreign exchange market for the foreseeable future.

“The decision to maintain the monetary policy stance is based on the MPC’s view that…there has been material success in controlling core inflation,” the BOJ release accompanying its decision said.

Core inflation at July 2023 of 5.2 per cent was lower than the 8.4 per cent recorded at April 2022, the BOJ pointed out further. Headline inflation, on the other hand, at July 2023 of 6.6 per cent was much lower than the peak rate of 11.8 per cent recorded at April 2022.

Core inflation tracks increases in everything except food and fuel, whose prices tend to be volatile. The core inflation number influences central banks’ monetary policy decisions more than headline inflation since the prices it tracks such as the cost of books, health care, bus fare and rent tend to be more stable than food and fuel prices.

Also influencing the decision to keep its key policy rate unchanged is the risk that economic growth this year could be lower than the forecast 1-3 per cent, with tourism — which has led Jamaica’s economic recovery — particularly vulnerable.

“Growth in tourist arrivals and related activities could be adversely affected by headwinds to global growth. There is also a risk that domestic consumer spending could be adversely affected by the larger-than-expected impact of domestic inflation,” the central bank said.

So far the economy has continued to expand beyond recovery, with estimates that growth was between 1 and 3 per cent for the January to June period, with signs that the expansion continued in the months after.

But with more Jamaicans working now than ever in the country’s history there are signs that the BOJ could soon have another issue challenging its biggest obstacle in the inflation fight, wage increases.

“The notable decline in the unemployment rate (as at April 2023) to 4.5 per cent, supported by anecdotal information about wage adjustments in selected private sector industries, indicates that the domestic labour market is very tight,” it said. A tight labour market often results in higher wages, which itself leads to inflation through the classic “wage-push inflation scenario” where too much money is chasing too few goods and services, resulting in companies increasing prices as a result.

There has already been an uptick in inflation over the last few months with the rate rising from 5.8 per cent in April to 6.6 per cent in July. The BOJ said it expects when the inflation rate for August and September are released it will see that uptick continuing, driven by higher agricultural prices, higher education costs, and wage pressures. However it said in the following quarter — October 2023 to December 2023 — the inflation rate will fall back to its target of 4 per cent to 6 per cent, “and with the exception of a few months in 2024, remain there”.

Still, it warns inflation could rise above that projection if future wage settlements in the tight labour market are bigger than expected, along with other issues such as higher agricultural prices driving up other consumer costs, a worsening in supply chain conditions, and oil prices rising beyond forecast.

On the flip side, the BOJ said if the global economy grows slower than has been projected it could reduce domestic demand and, in turn, cause inflation to fall below the projected 4 to 6 per cent range the BOJ said it will fall in the last quarter of this year. A delay in expected fare increases could also push inflation below the target range, the central bank pointed out.

By keeping interest rates steady the BOJ hopes that previous rate hikes will continue feeding through the economy to make borrowing and investing more expensive, thereby reducing overall demand for goods, services and labour in the economy.

But deposit-taking institutions have been slow to follow the central bank’s lead, cutting their weighted average lending rate by 0.16 percentage points during the same period in which the BOJ’s policy rate was rising from 0.5 per cent to 7 per cent. Banks have started to increase rates since then, but not to the satisfaction of the BOJ.

“The MPC continues to see a relatively strong, lagged pass-through of its policy rate to interest rates in the domestic money and capital markets and the term rates offered on deposits by deposit-taking institutions (DTIs). However, the upward adjustment in these rates has slowed, consistent with the MPC’s pause in interest rates,” it said.

The private sector is already feeling the pinch, however, from rate hikes.

“The flow of new loans to the private sector declined in real terms by 6.2 per cent over the year to May 2023,” the BOJ pointed out.

Yet, there are no signs about what the central bank will do when its MPC meets again in late September.

“Future monetary policy decisions will depend on the incoming data related to the indicators of the above-noted potential headwinds to inflation. The bank will continue to closely monitor the global and domestic economic environments for potential risks to Jamaica’s inflation rate and act accordingly,” it said.