BANK OF JAMAICA Governor Richard Byles has sent a clear message to the market that it should not look to see interest rates falling to anywhere near its pre-pandemic historic low of 0.5 per cent anytime soon, citing inflation staying higher for longer than anticipated as the reason.

Byles, who was addressing the Standing Finance Committee of Parliament on Tuesday, outlined that the behaviour of inflation in the last three years is causing the central bank to re-evaluate how it sets interest rates to tamper down price increases. The central bank typically uses what it calls a neutral rate as a guidepost for monetary policy, particulary its interest rate action. It tends to set policy rates above the neutral rate to cool the economy, or below the neutral rate to stimulate it. While the BOJ does not publish what that neutral rate is for Jamaica, Byles signals that how the market has responded to the hike in policy rate from 0.5 per cent to seven per cent between October 2021 and November 2022 (it has been maintained at that rate since) suggests the central bank’s estimate of the neutral rate may be too low.

“I think that what we are learning and what we are seeing in the current environment is that the neutral rate is a little higher than what we perceived of it in the previous period. I recall, in [the] pre-pandemic [period] worldwide, rates were really very low for a sustained period of time, and inflation was very low too, so the kind of neutral rate was low,” he told members of the Standing Finance Committee.

“I think, looking forward and seeing how sticky inflation has been in coming down, I would say that our view is that the neutral rate is going to be somewhat higher than it was pre-pandemic. And so what that means, generally, interest rates are not likely to go as low as they were pre-pandemic.”

The signal that the central bank’s policy rate will not fall back to 0.5 per cent in the near term comes as expectations heightened that the BOJ will start cutting the rate sometime this year. Byles said Hurricane Beryl is likely to interrupt the trend of declining inflation over the last four months, but he said the obtrusion will be temporary, tracking “above the BOJ’s target range of four per cent to six per cent for two to three months, starting in August 2024”. He, however, did not say what impact the forecast uptick in inflation will have on plans to start cutting rates before the end of the year.

The central bank has, however, been at pains to point out that the neutral rate is not static as it changes based on inflation expectations. Currently it is a little above five per cent, though the central bank would not be drawn on saying what it is. But Byles told the parliamentary committee that it means the central bank has to be careful in setting its policy rate in the future.

“As we see it now, we would rather a higher neutral rate than to find ourselves in a situation where our rates are lower than inflation — that’s our general outlook. As inflation abates then I would say our outlook on the neutral rate would also change, somewhat.”

Turning to the policy rate, he added: “I think that generally seven per cent is not an encouraging policy rate and we do want to see it come down, and I do think that it does have some impact, certainly on capital markets. The deposit-taking institutions have shown it’s less impactful to them, and retail credit, and business credit, but generally I think we would like to see that rate come off.”

That statement of wanting to see rates “come off” sends another signal that rate cuts are coming. The view is that current interest rates are restrictive, and the central bank has already turned to the money market — where it has most influence — to start its drive to reduce rates. Towards that end, in June it said it will start to reduce its intervention in the money market, leaving more funds for onlending to push down rates on 30-day certificate of deposits which reached 11.9 per cent in April — closer to the seven per cent policy rate — ahead of rate cuts.

Add to that are positive signs that underlying inflation is under control. Core inflation, which excludes the prices of all food types as well as fuel prices (including transport prices) from the annual change in the consumer price index, was 4.9 per cent at June 2024, and when transport prices were excluded the core rate was estimated at 4.6 per cent.

With all signs lining up in a row, Byles was ready to double down on the promise of rate cuts starting this year.

“The Federal Reserve has not moved one iota yet [to cut rates] and has not given any formal intention that they intend to move [to cut rates]. We have said we see the trend, we like the trend, and we have actually done something practical by loosening liquidity, opening up liquidity, and bringing money market rates down. So, just as we were ahead of the Fed in tightening, we are somewhat ahead of the Fed in beginning to loosen.”