BOJ holds interest rates steady, but…
The Bank of Jamaica (BOJ) held interest rates steady on Monday and signalled that it was still leaning towards reducing borrowing costs sometime this year, but warned that wage-related pressures and high inflation expectations could scupper such plans.
The decision means that BOJ’s policy rate, which has been at seven per cent since November 2022, will remain at that level at least for the next six weeks.
The warning comes on expectations that a rate cut is in the works this year after inflation data show price increases were within the central bank’s target range for a second-consecutive month in April
— 5.3 per cent
— following a 5.6 per cent out-turn in March. The BOJ is mandated to do what is necessary to keep price increases in a range of four per cent to six per cent on an annual basis.
BOJ Governor Richard Byles saying at an Inter-American Development Bank seminar in April that he would be “looking cautiously at the possibility of them notching down slowly” over the next six months also heightened expectations of a rate cut.
But the central bank’s monetary policy committee (MPC) indicated that cutting rates won’t be as straightforward as some are expecting.
It pointed out that inflation for the year so far, though lower than expected, is projected to go above six per cent again by June with higher prices for agricultural items which normally rise at this time of year and an uptick in international oil prices being the main drivers.
Yet, it said after that, and for the next two years to June 2026, inflation should be within its target range, except for a few months in 2025 when it is expected that agricultural price increases will again push inflation above target.
“While inflation is moderating, it is still not firmly anchored within the target range and the risks to future inflation are skewed to the upside, meaning that inflation could be higher than projected,” the central bank said.
Given that, the “MPC noted that future monetary policy decisions, including to reduce interest rates, will depend on incoming data related to the risks to inflation stated above”.
It said particularly worrying for it in the inflation fight is the evolution of wage increases, inflation expectations and core inflation
— all of which will be looked at as important factors that will guide the MPC’s decisions on policy rate adjustments and other monetary policy actions in the future.
Another factor the MPC is watching ahead of any rate reductions is the impact its action is having so far on the economy. Higher borrowing costs aren’t having as much of an impact as economics textbooks would suggest. Jamaicans as a whole, for example, are still borrowing strongly even as more of their incomes are being spent on interest payments than a few years ago, despite the BOJ’s sharp rate increases. That means higher rates may not be doing much to limit spending with the knock-on effect being to cool inflation, though the central bank will be pleased that deposits remained robust.
“Local currency deposits grew by 14.5 per cent at February 2024, an acceleration relative to 9.6 per cent at February 2023, and were above the projected growth in nominal GDP for the March 2024 quarter. The flow of new loans to the private sector increased in real terms by 3.6 per cent over the year to February 2024. There were also increases in loan and deposit rates in February 2024,” the central bank said in notes accompanying its rate decision.
Turning to the broader economy, the news is not so good. Growth has been moderating, and the estimate is that it was within the range of 1.5 per cent to 2.5 per cent for the fiscal year which ended on March 31. The growth is expected to continue into this current June quarter, but after that, there is uncertainty.
“The risks to the domestic GDP forecast over the next eight quarters are assessed to be on the downside, which means that actual GDP growth could be lower than forecast. On the downside, escalations in geopolitical tensions could adversely affect global growth and hence external demand for tourism services,” the BOJ added.