THE Bank of Jamaica (BOJ) has indicated that the Government needs to work out a “more structured approach” to how it goes about implementing changes in some regulated prices to give it a hand in the fight against inflation. The central bank did not identify which regulated prices it was referring to – they include bus and taxi fares and utility rates. However, the BOJ has had to issue an apology recently after acknowledging that it erred in calculating the impact an additional $1-billion subsidy to the State-owned Jamaica Urban Transit Company (JUTC) would have on offsetting inflation that would come from a 35 per cent increase in taxi fares.

The central bank had advised that without the $1-billion subvention, the increased cost to use privately owned public passenger vehicles (PPVs) would have pushed inflation up by two percentage points. It, however, was left with egg on its face when it was forced to acknowledge that it overestimated the impact the additional subvention it advised the Government to implement. It has since said the subvention to cut adult JUTC fares by 50 per cent and that for students and pensioners by just over a third will only reduce inflation by a negligible 0.2 percentage points, prompting the Opposition to question the value of implementing the policy.

But clearly burnt by the episode and not wanting a repeat, the central bank issued the following statement on Thursday amongst the notes accompanying its monetary policy release.

“Against the background that some changes in regulated prices do not reflect current demand conditions and could potentially reduce the effectiveness of monetary policy in managing inflation, the monetary policy committee (MPC) noted the need for a more structured approach to implementing these price changes.” It did not propose what approaches could be considered.

Wayne Robinson, senior deputy governor at the BOJ added in response to queries from the
Jamaica Observer.

“Adjustment in regulated prices are discretionary and can be unpredictable and therefore may not reflect current economic conditions but a ‘catch-up’ response to accumulated past costs or inflation. When these adjustments occur, they generate discrete jumps in inflation and there is nothing monetary policy can do to ‘directly’ mitigate their effects. This then makes our job harder. The most we can do is try to dampen the second round effects of these price shocks. It would be easier to manage if these changes occur in a more predictable, and importantly, more timely manner rather than as surprises.”

The last sentence suggests making the adjustments happen more frequently to account for inflation rather than having huge gaps in the number of years in which prices are increased. Economist Keenan Falconer said the message is clear.

“I believe the MPC is speaking to the fact that these price increases are not market determined and as a result, it is difficult to conventionally constrain demand through hiking interest rates,” Falconer told the Jamaica Observer after analysing the statement. “To a large degree, it could be said that some of these price increases are profit-driven in the absence of increasing supply and/or quality of service delivery. As a result, the associated inflationary risk is higher and more difficult to control,” he added.

Still, Falconer pointed out that PPV operators agreeing on Thursday to delay the 16 per cent fare increase that was originally scheduled for Monday, April 1, 2024 as the second and final phase of its 35 per cent hike, would have a big impact on helping the BOJ to bring stubbornly high inflation into more tolerable territory much quicker than forecast.

“Now that this decision [delaying the fare increase] has been taken, I would expect it would help to improve the attainment of the [inflation] target much earlier,” Falconer told Sunday Finance. PPV operators will now meet with the Government to “identify and agree other incentives” that would take into account measures that would have less adverse impacts on inflation.

Inflation has declined in recent months, but has been stuck above the targeted maximum of 6 per cent for longer than the BOJ would have liked, due in part to the lingering impact last October’s 19 per cent increase in PPV fares – the first phase of a 35 per cent increase – has been having on consumer spending.

In fact, the BOJ said had it not been for the increase in the PPV fares, it would have curtail inflation within the target range by the end of this year. Before the agreement with transport operators, the BOJ was gearing up to take the inflation fight into the first half of next year. So far, it has been cautious, announcing on Thursday that its rate setting monetary policy committee (MPC) decided by unanimous vote to continue holding its key policy rate at 7 per cent, until at least its next meeting scheduled for late May.

And while it is too early to say what impact the delayed fare increase agreement will have on inflation though.

“It should help to improve the projections coming next time,” Falconer, however, pointed out.

As for the Government, it has sprung into action. One hundred new buses for JUTC in the next few months should see the State-owned transporter doubling the number of passengers it moves from 14.8 million in 2023/24 to 31.7 million in the 2024/25 fiscal year which begins Monday. Apart from improving access to buses, that should also have a positive impact on inflation, though, still at this early stage, the magnitude of the impact is unclear.