THE Bank of Jamaica (BOJ) said its inflation fight over the last two years has already cost it upwards of $20 billion, but added that it remains profitable and is expected to continue disbursing these profits to the Government.

Richard Byles, governor of the Bank of Jamaica, said the cost stems from the higher interest rates it has had to be paying on monies it now holds as reserves for deposit-taking institutions and debt instruments it has been issuing as part of its efforts to combat higher-than-targeted inflation.

“The Bank of Jamaica, in raising its policy rate from 0.5 per cent to 7 per cent, now has to pay that 7 per cent to any deposit-taking institution that keeps a balance at the Bank of Jamaica,” Byles told reporters Monday.

That 7 per cent interest rate is paid on the $174 billion the central bank is now holding as reserves for commercial banks and other large financial institutions. The figure is $34 billion more than it was a year ago.

“Remember, Bank of Jamaica is the bank for banks,” he continued. “So just like you, and I may have some money in our pockets but also [have] some money in the bank, [the banks], too, have some money in their vaults as well as some money here at the central bank. And the money that they have here at the central bank, we pay them the policy rate of 7 per cent, so from that point of view, it is more expensive for us.”

Byles added that apart from paying more on deposits the central bank holds for the entities it regulates, it is also paying more on debt instruments it issues as a means of reducing the amount of money available in the economy for transactions. By doing so, the aim is to retard the ability of consumers to spend and for businesses to raise prices, thus helping to cauterise inflation.

The BOJ balance sheet shows it has $210 billion in debt instruments in early August 2023. That figure was $181 billion a year earlier and was $196 billion in August 2021, just one month ahead of the period in which the central bank started its rate hikes.

“To the extent that we are offering more of those at higher rates — 7 per cent — it costs us more to carry out that open market operation,” Byles pointed out.

“So, generally, our Jamaican dollar expenses, in respect of deposits held here at the central bank by commercial banks as well as open market operations, has cost us a pretty penny more. I believe the number is $20 billion or something like that,” he clarified.

Still, the BOJ said, with other central banks hiking their own policy rates to tackle inflation, it has booked more income from its assets, particularly its own reserves that are invested abroad.

“The bulk of our reserves are in US dollars and invested in international securities, AAA. What we find is that those rates are rising from, in some cases, 0.25 per cent up to 2 per cent, 3 per cent, 4 per cent. So those rates are coming up, and that’s the bulk of the reserves that we have. And when we bring those into our profit and loss accounts, we actually make quite a big profit off of that and it more than compensates for the cost,” he highlighted.

Byles, however, did not say how much is earned on those assets.

However, BOJ data show that at the end of July it has $8.56 billion in profit.

“At the end of the day, the litmus test is the profitability of the institution,” Dr Wayne Robinson, senior deputy governor of the BOJ pointed out.

He points to the $20 billion in capital the central bank has to weather any storm as it carries out its mandate to bring inflation down to the targeted 4 per cent to 6 per cent range.

“This is what the central bank is here for. Our raison d’être is inflation, and as an institution, it is going to be a cost which we have to absorb, and it’s precisely in recognition of this, when the bank was being reformed, the Government injected significant capital to recapitalise the bank so as to enable us to actually absorb these costs,” Robinson said.

“But apart from the Bank of Jamaica’s profit and loss, the country as a whole has benefited in the sense that we have lower inflation than if the Bank of Jamaica didn’t do what it has done, and that is a benefit and a gain that is almost immeasurable. The fact that we have inflation of 6 per cent instead of inflation of 10, 11, 12 per cent is gigantic and everybody in Jamaica can appreciate that, that is a bullet that we have dodged as a country and that value is enormous,” Byles added.

The BOJ now has $1.2 billion distributable profits that can go to the Government.

In March 2021, the BOJ paid a $33-billion dividend to the Government. That money was absorbed into the Consolidated Fund to help the Government meet its spending needs for the 2021/2022 fiscal year.