Balance is needed
PSOJ continues offensive against BOJ rate hikes

THE Bank of Jamaica (BOJ) continues to face fire from the Private Sector Organisation of Jamaica (PSOJ) over its “aggressive increases in interest rates”, with the call now being for the central bank to find a “balance” in its response to runaway inflation ahead of the announcement on interest rates to come later today.

The central bank has increased interest rates six times in the last nine months, bringing them from 0.5 per cent — a level they were kept at for two years from August 2019 to October 2021 — to 5 per cent as it seeks to contain inflation which reached 10.9 per cent in May. That is double the central bank’s 5 per cent target for inflation and well above the 4 per cent to 6 per cent range it aims to keep price increases each year.

The decision has brought heavy criticism, especially from the PSOJ.

“My view and the view of the economic policy committee [of the PSOJ] that we have been putting out there is that, balance is needed in terms of responding to inflation. We believe the inflation has very little to do with local conditions,” Dr Adrian Stokes, vice-president of the PSOJ and a financial economist, told journalists at a recent Jamaica Observer Business Forum.

Stokes has been very vocal against the recent increases in interest rates by the central bank. He pointed out that the BOJ’s rate hikes are blunt tools for trying to lower inflation that is being driven by overlapping crises — the novel coronavirus pandemic, supply chain issues, and the ongoing war in the Ukraine.

STOKES...the nature of the inflation that we are facing is not one that is in need of this kind of aggressive monetary action, given the underlying weakness of the Jamaican economy (Photo: Karl Mclarty)

The BOJ has even indicated several times during the last few months that such factors are out of its control and may force it to push rates even higher to ultimately bring down inflation.

But Stokes maintained, as he first said in August last year to this newspaper, that the central bank is going down the wrong path.

“The nature of inflation is very important in terms of how monetary policy is formulated and not just the nature of inflation, but also the characteristics of the inflation, in other words, what is driving the inflation.”

“When we look the US in particular, we see in the United States...their economy is well above the pre-COVID level in 2019, and they are running a massive fiscal deficit which is supporting the economy. Inflation in the US is being driven by a very strong economy and also supply chain issues emanating from COVID. It is therefore no surprise to see how the Fed has been responding to that,” he said of interest rate hikes announced by the US central bank, the Federal Reserve.

The Bank of Jamaica continues to face criticism from the Private Sector Organisation of Jamaica over its recent hikes in interest rates.

The Fed’s benchmark short-term rate, which affects many consumer and business loans in the US, have been pegged to a range of 1.5 per cent to 1.75 per cent — and Fed policymakers forecast a doubling of that range by year’s end as it seeks to contain inflation which reached 8.6 per cent in May— the highest it has been in four decades.

“At first they were very tepid because they have two mandates, control inflation and promote full employment. And so, in 2021, when people were saying that the Fed should raise rates, it wasn’t convinced because it thought the supply chain issues would dissipate. It didn’t bargain for the war in the Ukraine. But given the war in Europe, and the impact it has had on food and fuel prices, the Fed has chosen to respond,” Stokes continued.

“If you look at our market in Jamaica, it is very different. One, our economy is still below pre-COVID levels; and, two, we are running a very tight fiscal ship. In fact, we are scheduled to run a slight fiscal surplus in this fiscal year after running one in the last fiscal year. Then recall that before this, we have fairly low inflation, although interest rates were almost zero.

Stokes’ staunch stance against the central bank’s action has come in for criticism from the bank itself.

Governor Richard Byles, in a press briefing in November, slammed critics of the bank’s action; noting, “The very same voices which are talking out against the...movement in our policy rate, those very same people would be criticising the central bank for not being more proactive,” the former insurance executive turn central bank governor retorted.

But Stokes was unmoved when that criticism was put to him. He pointed out that one of the key variables analysts have to look at when analysing inflation is wage growth.

“It is very, very important to determine how you respond to inflation,” he argued. “Central banks fear inflation because of what we call the wage-price spiral. In other words, it’s very hard for inflation to be sustained if wages are not increasing faster than inflation. So one key question we need to ask is: Are we seeing rapid increases in wages above inflation? I don’t have that data, but the answer, anecdotally, is no. Is the Observer increasing the wages of reporters by 10 to 12 per cent? Is the PSOJ increasing wages 10 to 12 per cent? Is GraceKennedy increasing wages 10 to 12 per cent? You would be hard-pressed to find anyone increasing wages at that rate, and so, therefore, we do not believe the conditions are there to support inflation going forward,” he said answering his own questions.

Stokes point to inflation in April, which was -0.7, and May at 0.3 and said those numbers show that inflation is running out of steam.

“So, we believe, and we have said it before, that inflation will moderate, and it has nothing to do with the [actions of] the Bank of Jamaica [in increasing interest rates].

Doubling down on his stance against the interest rate hikes while the economy remains weak, though recovering, Stokes argued that if the actions cause the economy to relapse, the consequences could be worse than the initial problem.

“Our point is, inflation is bad, really, really bad for the poor. But what really hurts the poor even more than inflation is not having a job; it’s actually worse than inflation.

“And so we are saying there definitely needs to be a cautious approach because of the state of the Jamaican economy. We are still recovering. We are not as strong as the US economy.”

Asked what he would recommend the central bank do, Stokes was forthright.

“Probably the approach that I would have taken would be very similar to the Fed. I would have been very cautious at the get-go to understand the nature of what we are facing. If you find yourself with long-term inflation expectations being unanchored, because that’s a real problem, then you would have to really raise rates to get credibility. I don’t know that long-term inflation expectations in Jamaica have gone unanchored.

“The nature of the inflation that we are facing is not one that is in need of this kind of aggressive monetary action, given the underlying weakness of the Jamaican economy,” Stokes concluded.

Dashan Hendricks

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