LITTLE IMPACT
JAMAICA’S central bank will meet this week to consider and communicate its next move to control runaway inflation. The meeting comes with analysts at NCB Capital Markets forecasting that the Bank of Jamaica (BOJ) will remain hawkish and push its policy rate up by 0.25 per cent to 6.25 per cent — the highest the BOJ’s policy rate has been since January 2013. The expectation comes amid signs that its rate hikes are having little impact on the prices firms charge their customers.
The matter of the impact of interest rate hikes on the pricing decision of firms was discussed at the BOJ’s last monetary policy committee (MPC) meeting on August 16 and 17, 2022, according to the minutes of the MPC which were released in mid-September. Under the BOJ Act (section 34FG(4)), it is provided that the minutes of each MPC meeting shall be published on the central bank’s website within four weeks of the conclusion of the meeting.
According to those minutes, preliminary results of a survey on the price-setting behaviour of firms in Jamaica were presented. The survey’s main objective was to better understand the factors that contributed to a firm’s decision to change its prices and clarify the role of expectations in this price-setting process.
The survey was conducted between June and July of this year, and 110 respondents participated. The respondents included firms that operated in the services industry and the production/supply of durable goods.
Matters arising: According to the survey, changes in interest rates and tax rates were the least important factors behind pricing decisions by firms. The survey also indicated that 83 per cent of the respondents had not reduced their prices over the past five years, possibly related to changes in the main factors that affected their pricing decisions.
Another finding is that competition in a sector also influenced firms willingness to adjust prices.
According to the MPC minutes, “More than 50 per cent of the respondents indicated that they were aware of more than 20 competitors in their segment of the industry. This implied that they may not be able to adjust prices easily compared to firms that operate in less competitive market structures.”
The respondents typically adjusted their prices on a quarterly or annual basis. The MPC minutes outlined that given the frequency or more specifically, how infrequent prices were adjusted, there may be a lag in passing on input cost increases to the consumer. In other words, while consumers will see international or even local raw material costs, for example, going up, those higher costs were not immediately reflected in the final prices of goods and services.
The MPC noted the response from the central bank’s survey of price setting behaviour that interest rates do not play a major role in the price-setting process of firms, based on the reported low weight of interest rates in the cost structure of firms. The MPC also noted that some firms appeared to pass on higher prices to consumers without seeking to change their level of productivity. In relation to the staff’s conclusion that firms in industries with more than 20 other firms may not be able to adjust prices easily, the MPC noted that these decisions more depended on the market power of selected firms in the industry and less on the number of players.
Also, despite studies showing that changes in the exchange rate have less impact on domestic prices now than it did just over 20 years ago, the survey highlighted the exchange rate as a dominant factor influencing the firm’s decisions to change prices over the last two years, and to change prices in the future. Other factors affecting pricing decisions included changes in the cost of raw materials and other inputs, demand for the product and the level of profits.
Breaking it down: For the central bank, some of the findings of the survey will be frustrating. For one, the BOJ has been raising rates over the last 12 months to push inflation back to within its target range of 4 per cent to 6 per cent, but as the central bank expected and communicated, the task would be difficult. In fact, though inflation peaked earlier and lower than expected in April 2022 at 11.8 per cent and started to slow slightly after, reaching 10.2 per cent in July and August, the BOJ was blunt in its reckoning and made note of it in the minutes of its MPC meeting in August, that “the conditions that led to the recent inflation out-turns appear to have not sufficiently solidified to ensure that inflation was sustainably on a downward path.”
What is, however, of concern is that while policy rates at 6 per cent are the highest they have been in Jamaica since 2013, the efforts at using interest rates to create price stability is to be studied more, given that the survey shows firms did not change prices because interest rates were increasing. In fact, the only firms which did were deposit-taking institutions. It was highlighted that though interest rates offered by commercial banks on new loans to medium and large businesses and interest rates on new deposits continued to increase during the June quarter, albeit at a weaker rate than expected.
Why it matters: Both the Private Sector Organisation of Jamaica and the Jamaica Manufacturers and Exporters Association have called out the central bank on its rate hikes, pointing to the damage it could cause an economy which is still recovering from the COVID-19-induced slump it entered in 2020. But there is hardly any data, at least at the moment, to suggest the economy is being impacted in any serious negative way.
In fact, the central bank expects the economy to continue its recovery this year, recording growth between 2.5 per cent and 4.5 per cent. Though this is expected to slow next year to a range of 1 per cent to 3 per cent, this is hardly the recession that many had expected to come with increases in interest rates. An eye must be kept on what is happening in the United States though, with signals from the Federal Reserve — the world’s most important central bank — that taming stubbornly high inflation in the United States, would take, slower growth, higher unemployment and potentially a recession.
Important context: The forecast was for inflation to peak in the range 12 to 15 per cent in the June quarter. Note, the June quarter covers April, May and June. But that inflation forecast has been fluctuating.
In February, the MPC was projecting inflation to average in the range of 6 to 7 per cent over the ensuing two years. By May, the BOJ upped that forecast, saying it expects inflation to average 8 per cent to 9 per cent over the next two years. In its August meeting, the forecast inflation was set at 6 to 8 per cent as grain and fuel prices started to decline.
What next: We await the decision of the central bank this Thursday. It communicated last month that if conditions permit, it is prepared to halt interest rate increases, but a lot of that depends more on core inflation than on headline inflation. Core inflation, which excludes the impact of food and fuel prices from the headline inflation, was measured at 8.7 per cent in June (the latest data on core inflation available publicly). Though the June figures were down from the 9.9 per cent core inflation was in February, it still made up a huge portion of the overall headline inflation of 10.9 per cent. The core price figures solidify worries that inflation has now spread into all corners of the economy and is not just imported anymore. The BOJ monitors core prices closely, and the latest figures heightened fears that the central bank will remain hawkish.