Central bank governor to use all toolsSunday, November 04, 2012
By Keith Collister
AT a press briefing on Thursday, Bank of Jamaica Governor Brian Wynter announced a cut in the inflation target for fiscal year 2012-13, from the previous revised target of 10 to 12 per cent to between 7.5 to 9.5 per cent. Jamaica's inflation rate for the quarter ending in September was 2.1 per cent, which followed an inflation rate of only 1.5 per cent for the quarter ended in June, or an inflation rate of only 3.6 per cent for the first half of the year.
Importantly, this projection "incorporates our preliminary assessment of the impact on prices of Hurricane Sandy." Arguing that the main impact of Sandy will be on agricultural prices, the Governor observed that the comparable tropical Storm Nicole had added 0.5 per cent to the overall inflation rate.
"The more favourable outlook relative to the previous forecast also reflects lower than originally anticipated international commodity prices, continued excess capacity and a marginal increase in real wages."
The inflation target for the fiscal year had originally been raised from six to eight per cent due to the anticipated impact of the tax increases announced in the budget. However, the Governor noted, "With September's inflation recently announced by STATIN, we can now confirm that very little of the tax increase has been reflected in consumer prices."
At the same briefing, the Governor commented on three new variable rate certificates of deposit (CD) that the Bank of Jamaica began offering Wednesday for periods of 49 days, 182 days and 364 days. The first 49-day CD, repricing monthly at 0.6 per cent above the 30-day treasury bill, had an initial coupon of 6.81 per cent per annum. The second 182-day CD repriced quarterly at 0.8 per cent above the three-month treasury bill rate, with an initial coupon of 7.18 per cent per annum. The last 364-day CD repriced quarterly at one per cent above the three-month treasury bill rate, with an initial coupon of 7.38 per cent per annum.
Wynter noted that the reaction had been favourable so far, with the first instrument, targeted to raise $6 billion, closing as scheduled after one day on October 31, and the other two "unlimited" offer instruments scheduled to close on Monday, November 5.
The Governor advised that the tightening of monetary policy was already "having an effect".
In a follow-up interview the next day, asked whether he had a threshold below which he did not want to go in the use of the net international reserves, the Governor advised that "there is not and hasn't been any arbitrary limit to the use of tools at the Central Bank's disposal in pursuit of its inflation target, and we will use all the tools at our disposal."
He clarified that this means that at times it was appropriate to use reserves, and at other times it was appropriate to use other instruments. He described his issuance of CD's to tighten monetary policy as "judicious", balancing the fact that some aspects of the current state of the economy might mean that the Central Bank would want "to go the other way", cutting interest rates, against the need to preserve order in the exchange rate market.
He noted that Jamaica has a relatively thin, "lumpy" foreign exchange market, and that the current use of reserves had been focused on addressing the issue of confidence in the foreign exchange market. He didn't think that economic conditions called for tougher monetary policy measures today, but if they do, the Central Bank had the tools to do the job.
As a consequence of the tough budget, which substantially tightened fiscal policy and created a healthier set of fiscal accounts, monetary policy could be easier, with lower interest rates helping to support growth. However, whilst some of the current economic conditions supported negative real interest rates, that couldn't be a long term policy.
As he had advised in the previous interview, he noted that there were no new challenges in the IMF programme, which in addition to tax reform and administration, pension reform and wage restraint, included the issue of how to address growth and competitiveness, and the related issues of the debt and doing business.
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