THERE are signals coming from the Bank of Jamaica (BOJ) that rate hikes could resume soon as its forecast continues to show a new round of heightened price increases in coming months. The latest signal of a resumption in rate hikes came in the central bank’s financial policy committee (FPC) statement released last Wednesday.

The FPC report, pointing out that consumer prices are likely to rise by more than 6 per cent again in the near future, said “further monetary policy tightening could be required” to push price hikes to the target of between 4 per cent and 6 per cent. This is the second time in recent months that the central bank has hinted at returning to its hawkish posture. It signalled in its September monetary policy committee notes that “[it] is prepared to take the necessary actions” to curtail inflation, which its outlook shows should rise above 6 per cent for a few months in 2024.

Already the Government has announced it will pump $1 billion into the Jamaican Urban Transit Company Limited (JUTC) and is adding new buses to give people a cheaper option than the higher fares they are required to pay on privately owned public passenger vehicles (PPV). That is expected to help keep inflation within the target range, “except for December 2023 and a few months in 2024”, the BOJ governor Richard Byles said in his monetary policy press statement in November. The signal then is that most of next year will have inflation above 6 per cent.

“Moreover, inflation among Jamaica’s major trading partners could be sustained above their targets for longer than currently anticipated,” the FPC noted. It pointed out that inflation worries stem from the wars in Europe and the Middle East, which continue to threaten higher global prices for commodities, such as grains and oil, while the country battles an unprecedented labour shortage that could put upward pressure on inflation through higher-than-projected future wage adjustments.

But financial economist Dr Adrian Stokes has indicated that he is against any action which pushes the benchmark interest rate higher than the 7 per cent it has been for the last year.

“As I’ve indicated before, the focus on heightened inflation going forward is misplaced,” Stokes told the Jamaica Observer after reading the report. “The spike in local inflation over the last two years was due to global factors that have now normalised…in line with the cooling of global factors. This was well understood from the outset and has come as no surprise,” he continued.

He outlined that the risks to the economy stems from growth slowing more than projected as higher interest rates take effect, curtailing companies appetite for borrowing to finance higher production and forcing consumers to cut back as payments for mortgages, credit cards, and car loans increase.

In the July to September quarter, the Jamaican economy grew by an estimated 1.9 per cent. The unemployment rate fell to a historic low of 4.5 per cent at July 2023. In October, inflation was measured at 5.1 per cent, down from the 5.9 per cent it was in September. The latest inflation figures for Jamaica is scheduled to be released on Friday. While inflation in the United States touched 3.1 per cent in November, down from 3.2 per cent in October.

“Undoubtedly we will continue to see inflation oscillate due to local weather conditions and global commodity prices. But core inflation will continue to moderate with the risk skewed to the downside, especially if the tailwind from the current high interest rates proves to be stronger than expected,” Stokes argued. He believes higher interest rates will slow the economy and help to cauterise price increases.

But the central bank, which chose to act early against inflation in 2021 because its actions can take up to two years to take effect, is not only concerned about inflation but also how its rate hikes.

“The risk of higher interest rates implies the potential for increased funding costs and fair value losses for financial institutions,” the FPC warned. It said stress tests were conducted to determine the impact on balance sheets of domestic financial institutions of further increases in bond yields.

“The results of the assessment showed that the DTI [deposit-taking institution] and securities dealers sectors were broadly resilient to the contemplated interest rate shocks. However, there continued to be instances of vulnerability, which would need to be remedied by additional capital injections,” it added.

The report also highlighted that risks, including cyber risk and climate-related financial risks, are becoming more of a concern.

The BOJ said it has “noted the spate of cyberattacks on financial institutions in the recent past and have enhanced their monitoring of the system, working closely with their licensees to ensure that their customers’ banking experience continues to be safe and efficient”. It said it will separately issue a set of principles that financial institutions will follow in addressing vulnerabilities to cyber events.

On the matter of climate change and associated risk to the economy and, by extension, to the financial system, the BOJ said it will also separately publish a set of commitments that they will pursue to enhance the climate resilience of the financial sector over the medium term.