History will absolve BOJ's rate hike

In August 2021, the Bank of Jamaica (BOJ) announced their likely departure from the accommodative monetary policy framework of several years. This intent was consummated on September 30, 2021, when they announced a 100-basis point (one per cent) increase in the BOJ base rate from 0.5 per cent to 1.5 per cent with a concerning rise in inflation being among the reasons for their decision.

In the aftermath, economists have been split on the matter, with at least one of note, Dr Damien King, supporting the step based on expected long-term economic stability, even with potential instability in the short term.

I share the view for the following reasons:

Firstly, it is factual that one of the main contributions to the global rise in inflation is the supply chain disruption in the Far East. The narrative, however, ignores that these challenges were exacerbated by increased US demand that is consistent with a recovering economy. Given Jamaica's recent 14.2 per cent rise in gross domestic product (GDP) for Q2 2021 relative to 2020 (all considered) and a 300 per cent plus increase in tourist activity, which incorporates agriculture and other linked sectors, the Jamaican economy will likely to rebound aggressively for the foreseeable future. This was attested to by both the International Monetary Fund (IMF) and Standards & Poors who lifted Jamaica's outlook from negative to stable, even within a debilitating pandemic. Long-term debt ratings remained constant.

In my view, the sustained economic rebound would have caused inflation to rise for far longer than the duration of the supply chain dilemma. Companies such as Nike have spoken to this spike in consumer demand in their recent earnings releases. It is therefore against this backdrop that I believe it is insufficient to say that the inflationary pressure will be removed by a well-linked supply chain and that base rates should not have been adjusted.

Secondly, central banks the world over have adjusted their monetary policy posture with New Zealand increasing base rates for the first time since 2014, and Brazil doing similarly. The USA has also signalled their intention to adjust their monetary policy by reducing their bond buying programme at a time to be determined, in addition to an increase in the Federal Funds Rate at an appropriate time. One suspects that the unwinding of their balance sheet would cause an uptick in rates there as well, which leads me to my concluding point.

From an investment standpoint, Jamaica's lagging behind developed markets in its policy posture could have created some measure of capital flight for developed economies having rates higher than ours, would potentially create a greater measure of appeal in their markets and cause investors to (1) increase FX investments and create outsized demand (and in turn, devaluation) for the JMD past the purchase of FX for goods/services/raw materials and (2) invest in foreign Fixed Income instruments and create upward pressure on interest rates.

The neutralising of inflation, which is brushing the upper end of the targeted four-six per cent, is a well-told story that I need not repeat.

In my estimation, the erudite economists at the now-independent Bank of Jamaica made the correct decision, and history will absolve them. 

Ryan Strachan is President of Generation 2000 (G2K). Send comment to the Jamaica Observer or president@g2kja.com.

Ryan Strachan

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