THE Bank of Jamaica (BOJ) has expounded on its assertion that the current five per cent, at which its key policy rate touched last week, is close to the level that the monetary policy committee (MPC) considers ‘appropriate’.

“We have a concept in the bank which we call the neutral rate and that’s the rate at which we are right on the edge of neither stimulating growth nor retarding growth and what we are saying is that we are within the proximity of that rate,” Richard Byles, governor of the Bank of Jamaica, told journalists on Tuesday.

“We are very open about it. We have come a long way, we still have a little way to go, depending on what the incoming data say to us, but we are closer to that neutral position than we were six months ago,” Byles added.

Robert Stennett, deputy governor for research & economic programming division and financial stability at the BOJ, explained further.

“The neutral rate is something which we estimate internally. It is that level of real interest rate that is neither retarding economic growth nor stimulating economic growth.”

But what exactly is that neutral rate?

Stennett: “We have used a variety of methods to estimate this neutral rate and the clear indication that came out is that the neutral rate for Jamaica as for many other countries, is highly variable and so our best estimate puts it in the region of plus or minus 2.6 percentage points. What this means is that if we are at long-run inflation of five per cent, our neutral rate can either be in nominal terms [between] roughly 2.4 per cent and 7.6 per cent in nominal terms. So a monetary policy rate of five per cent puts you in the middle of that estimated range that we refer to.”

Stennett continued, “Our future decisions about the policy rate is going to be guided by how inflation is evolving and how the factors that are driving inflation are evolving…there are key risks that we continue to monitor, not the least of which is the very fragile situation in the external commodity markets that has the potential to push inflation and inflation expectations higher. So while based on current conditions we believe that we are pretty close to the neutral rate, the coming data and the confluence of circumstances that face the bank will make us determine what next to do. We are going to be going into a period of highly conditional.

Stennett said the central bank is “pretty confident that the adjustments that we have made from October to now have taken us close to that neutral rate.”

“We look at the broad spectrum of interest rates in the economy including the interest rates on government bonds, treasury bills and so on and on loan rates. So we consider how the mix of our policy measures are influencing broad interest rates economy wide. And so, while the policy rate is pretty close, we can also be guided by the extent to which other rates in the financial system are all moving.”

“The neutral rate to which I refer is a long run measure. The long-run inflation target in Jamaica is now five per cent. A central bank that is adjusting the economy to get inflation to long run levels may infact need to push interest rates in the economy above neutral temporarily, but in the long run, this is where interest rates should go after inflation pressures have abated.”

— Dashan Hendricks