THE Government is now considering initiatives it hopes will help make the Bank of Jamaica (BOJ) more effective in fighting inflation, after the central bank pointed out that it has missed the target three times more than it has been achieved in the last three years.

The indication that efforts will be made to make the central bank more effective in carrying out its mandate to keep inflation in the target range were confirmed in an April 29, 2024, letter from the Minister of Finance Dr Nigel Clarke to the Governor of the Bank of Jamaica Richard Byles. The inflation target was confirmed to continue at 4 per cent to 6 per cent for the next three years. The BOJ had recommended the continuation of the 4 per cent to 6 per cent target in a previous letter dated April 11, 2024 to the minister of finance.

“The midpoint of this range of 5 per cent will be the operational target for the monetary policy committee (MPC). This target is effective as at April 2024 and will be in effect for the next three years,” Clarke wrote in the letter. The period which Clarke refers to is April 2024 to March 2027.

“I will again review the inflation target at the end of this three-year period,” he continued.

He also reminded the BOJ that when inflation deviates from the target, that is if it goes above 6 per cent or below 4 per cent, the central bank will be required to provide an explanation for missing the target within 60 days.

“This target is consistent with the country’s economic structure and stage of economic development,” Clarke explained in the letter responding to the recommendation from the BOJ that was under Byles’ signature.

But then he pointed to issues such as “the weakness of the monetary transmission mechanism, labour market rigidities, large and potentially sporadic adjustments in regulated prices”, which were labelled as things that “constrain the ability of the Bank of Jamaica to deliver a lower inflation rate in the near term”. The same issues were raised by Byles in a previous letter to the minister of finance.

Given that, Clarke outlined, “Going forward, I will support all efforts to ameliorate these constraints.”

Asked for more clarity on what “support” will be given to the efforts to, Clarke noted that they were “structural” and related to the monetary transmission mechanism.

Deputy governor of the BOJ Dr Wayne Robinson said Clarke is referring to initiatives to enhance the effectiveness of monetary policy, but said the initiatives being looked at are not yet settled and said that as soon as they are, “the public will be informed”.

BOJ Governor Byles has long indicated that the country’s two main commercial banks — National Commercial Bank (NCB) and Bank of Nova Scotia (BNS) — retard its efforts to use interest rates to influence spending in the economy. The BOJ increased its policy interest rate from 0.5 per cent to 7 per cent between October 2021 to November 2022, and has since frozen rates at that level, with the expectation that banks would have followed suit in raising interest rates as well, as a means to discourage borrowing, slow the economy and contain price increases. However, it has been noting that NCB and BNS, due to their large deposit balances, have been largely frustrating the central bank’s efforts by not raising rates as much as the BOJ would have liked, which, it says, has been part of issues that have kept inflation higher for longer.

“There are eight commercial banks in Jamaica, two of which are the dominant players, holding over 50 per cent of the loans and deposits in the system. Consequently, these banks have significant market power, which hinders new entrants to the financial system, stifles competition and disrupts the efficacy of the central bank’s response to inflationary pressures. Additionally, the dominant players tend to hold high levels of liquidity, which makes their funding cost less sensitive to the central bank’s policy actions.6 Other smaller DTIs will also not have an incentive to move their deposit rates, given the strong institutional impediments to attracting deposits away from the bigger DTIs. As example, among the principal factors behind deposit inertia in Jamaica is the KYC requirements placed on customers in moving existing accounts between banks or in opening new accounts.”

But a central bank faced with failing to keep inflation within target most of the times wants to get things right.

“The annual inflation rate has fallen outside the target range for 78 per cent of the monthly observations between January 2021 to January 2024,” it said, pointing out the difficulties it has to undergo to fight inflation.

“The frequency of breaches of the inflation target was influenced by major shocks relating to the coronavirus (COVID-19) pandemic and the supply-demand imbalance associated with the pandemic. Furthermore, geopolitical conflicts, particularly the ongoing Russia-Ukraine war, had a material impact on imported inflation to Jamaica. Inflation is currently projected to track above the 4.0% to 6.0% range until the September 2025 quarter, due primarily to upward adjustments to regulated prices and, to a lesser extent, wage-related price pressures. In this context, the Bank’s monetary policy stance has been tight, with the risks to the inflation outlook being balanced.”

Yet, more than just giving a recommendation for the inflation target to remain at 4 per cent to 6 per cent, the BOJ also outlined what it would have to do if the target was to be revised downwards, at about 4 per cent at the highest, and said the impact would be a reduction in the ability of the Government to continue its spending.

“Targeting a lower inflation rate (ie 4.0%) requires a large increase in interest rates of [3 per cent to 4 per cent],” it pointed out.

“This large adjustment is required to achieve a faster convergence of inflation to target over the March 2024 to March 2025 period, relative to the baseline forecast. Real GDP growth will consequently be lower over the period, relative to the baseline forecast, by an average of 0.3 percentage point,” it said.

It also added that if a lower inflation target were to be pursued, the exchange rate would depreciate at a slower annual rate and that “slower pace of depreciation implies lower revaluation effects on the debt stock, which partly offsets the deterioration (higher debt ratio) resulting from a lower nominal GDP. In the context of these simulations, the debt-to-GDP ratio will be higher by 2.6 percentage points at March 2028. Therefore, given the importance of increasing the economy’s resilience, a reduction in the inflation target may not be warranted at this time,” it concluded.

Jamaica’s debt-to-GDP ended the fiscal year (FY) 2023/24 at 73.4 per cent. On the basis of baseline projections for the inflation rate and other macroeconomic variables, the debt-to-GDP ratio is projected to be 56.8 per cent at end-March 2028, lower than the target stipulated in the fiscal rule which is 60 per cent.