'Convince me!'
BOJ governor tells critics to show how the country would be better off without recent rate hikes
BYLES...until someone can convince me that had we done nothing, had we left interest rates low, that we would be better off, then, until then I believe we are in a better place than we may have been had we not pursued the policies that we had.

THE Bank of Jamaica (BOJ) has doubled down against critics of its interest rate hike policy, reiterating to parliamentarians that the central bank would not stand around and do nothing, while inflation continues to ravage consumers' budgets.

Inflation in Jamaica has been running ahead of the central bank's 4 per cent to 6 per cent target, peaking at 11.8 per cent in April before retreating slightly to 10.9 per cent in May. The central bank has responded by hiking interest rates seven times over the last nine months to a seven-year high 5.5 per cent. The move has come in for heavy criticism from private sector groups, but the BOJ remains undaunted.

"I could liken what we are going through now as a category five hurricane, that's what it is," Richard Byles, governor of the Bank of Jamaica, told Parliament's Standing Finance Committee as he addressed questions about the bank's monetary policy decisions that have been topical over the last several months. Byles was referring to the inflationary environment that has gripped the world as commodity prices skyrocket, in the aftermath of Russia's invasion of the Ukraine. This came at the same time that supply chain issues were pushing price levels higher.

"If we had not taken the steps that we have, what do you think inflation would be in Jamaica? If we had not raised interest rates, not tightened liquidity, not closed down the banks net open positions (NOPs), where do you think inflation would be today? You could start at an exchange rate at, call a number, $170, $175. Do you know what impact that has on inflation? If everybody could get Jamaican dollars cheap because rates are low and then buy US dollars with it and then migrate their investments with it, where do you think inflation in Jamaica would be?" Byles asked rhetorically.

"So whilst, the results are not what we want them to be, in that we have 10.9 per cent [inflation rate], it's better than the 15 per cent, 17 per cent or 20 per cent that we might have had, had we not taken the steps that we have."

Critics have slammed the BOJ for raising interest rates, pointing out that the factors which are driving inflation are external.

Dr Wayne Robinson, senior deputy governor of the central bank, acknowledged that fact, telling parliamentarians that BOJ research shows 70 per cent of the inflation is from external sources, but added that the increases in interest rates "to control the second round impact", that is to reduce the increases in prices for products and services which have no relation to higher commodity prices.

"Until someone can convince me that had we done nothing, had we left interest rates low, that we would be better off, then, until then I believe we are in a better place than we may have been had we not pursued the policies that we had," Byles chipped in.

The governor said the monetary policy committee (MPC) is not bent on increasing interest rates for the sake of it.

"Believe you me, in the MPC we agonise about it and as we have left the 0.5 [per cent] behind and gone to 5 [per cent] and 5.5 [per cent], it becomes even more agonising as to whether we go any further or not. It's not a decision we take lightly. It's not a textbook issue. A lot of real life experiences and feedback come into whether we move rates or we don't," he said.

Byles, however, expressed hope that forecasts that commodity prices will decline in the second half of this year will materialise and that core inflation will start to come down. "Then we will be in a better position to determine whether we pause or not." The BOJ, in notes accompanying its rate decision last week, outlined that the annual point-to-point core inflation rate at May 2022 of 9.7 per cent, which is well above its target for headline inflation.

Core inflation represents the long run trend in the price level by stripping away changes in the prices of items such as food and energy because of their volatility. In measuring long run inflation, central banks tend to consider core inflation because it excludes transitory price changes which can be quickly reversed and so do not require a monetary policy response. The fact that core inflation is well above the target headline inflation range of 4 per cent to 6 per cent should be causing worry at the central bank.

To contain inflation, the central bank has employed three main tools: it has increased interest rates which is the most talked about tool, but it has also significantly increased the US dollar liquidity to the market and the energy sector and has also kept Jamaican dollar liquidity tight.

"Taken together, these actions by the central bank help to soften the impact of imported prices, to reduce demand in the economy, and consequently, the ability of businesses to pass on price increases to consumers," Byles told the committee.

So far rates in the money market and on consumer loans are either rising or are set to rise, the exchange rate has remained stable appreciating by 2 per cent since the start of the year compared to a 4 per cent depreciation in the same period last year.

"This stability in the exchange rate is playing an important role in moderating the cost of imported goods and tempering inflation expectations," Byles added.

For those with recession obsession, the central bank governor said while there is a concern, the current data are not showing economic contraction any time soon. The expectation is that growth will reach 2 per cent to 4 per cent in the current fiscal year which ends March 31, 2023.

One admission the bank did make was that it needs to ramp up its public education drive to help businesses and consumers better understand and appreciate the reasons for its actions, especially with a survey showing 67 per cent of businesses did not know about the central bank's inflation targeting regime.

"If we had not taken these actions, inflation would have been even higher and the impact on workers and the population in general, would have been worse."

The BOJ ran a successful programme about inflation two years ago and said it must go back to the drawing board to look at how it breaks down economic facts into popular language that people can understand.

But on the interest rate matter, the governor told the parliamentary committee, "hopefully it won't be high for long. If it has to be for an extended period of time will have to contemplate other measures."

Dashan Hendricks

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