THE Bank of Jamaica has kept its policy interest rate unchanged for the first time since its August 2021 monetary policy committee (MPC) meeting, citing a “generally favourable” inflation outlook after 14 months of matching red hot price increases with feverish rate hikes.

The central bank had first signalled a willingnesss to halt the increases in its policy interest rate from as early as August, and repeated it in November, “if the incoming data continue to reflect a downwards track for inflation”. But now it says, even though the 12-month inflation rate for November was reported at 10.3 per cent ­— the highest it had been since June — the fact that the price increases were within the range of 9.5 per cent to 10.5 per cent that it expected, and appears to be trending down, it was time to halt the rate increases.

“The key external drivers of headline inflation, such as grain, fuel, and shipping prices, continued to trend downwards and broadly in line with the bank’s projections,” it said, as it added, “as expected, the pace of monetary tightening by the United States Federal Reserve Board (Fed) appeared to be slowing. The slowing of rate increases in the US is key to the BOJ slowing or halting its own rate increases.

In the past it has said it could not stop hiking rates if the Fed is hiking rates out of fear it may cause capital flight.

But, despite the positive trends in terms of headline inflation, core inflation — which excludes food and fuel prices from the overall measurement — remains uncomfortably high at 8.8 per cent in November, even though it was lower than the 9 per cent recorded a month earlier.

At 8.8 per cent, the core inflation rate is twice the lower end of the BOJ target of 4 per cent to 6 per cent for headline inflation each year.

For sure, fuel prices are declining, though they remain high. Ahead of petrol price announcements tomorrow, the cost of E10-87 gasoline, the lowest grade and cheapest motor fuel, had an ex-refinery price of $162.66 per litre. That is down 33 per cent from its peak of $215.89 per litre recorded in early June and the lowest it has been in exactly one year, when the ex-refinery price was $162 per litre on December 23. At the same time, liquefied natural gas prices fell by 7.9 per cent during the last month, compared to a projected decline of 2 per cent, which should augur well for electricity prices in Jamaica.

Food prices remain high as well, up 14.3 per cent in the last year, outstripping the headline inflation rate of 10.3 per cent in November, on higher costs for vegetables, tubers, plantains, cooking bananas, and pulses following adverse weather conditions in the September 2022 quarter.

However, the BOJ said, “The indicators suggest that inflation over the next three to six months will be broadly consistent with the bank’s most recent inflation forecast. That, as international fertiliser prices fell by an average monthly rate of 8.7 per cent for October to November 2022, which should support lower agricultural prices. The BOJ is also expecting that agricultural prices will fall in early 2023 as a result of higher production from replanting.

Immediately, though, the central bank is hoping that the rate hikes it has been implementing since October last year will start to feed into the wider economy.

It has already seen rates going up in the money and capital markets, in line with the policy rate increases, but “the response of interest rates of deposit taking institutions has been slow”, the central bank said. However, it has been pressing financial institutions to respond.

Already it has noted that its policy signals are expected to cause interest rates on deposits and loans to rise further, making savings in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive.

It was noted that, between October 2021 and October 2022, the weighted average deposit rate offered by commercial banks to the public increased by 49 basis points. Average prime loan rates increased by 156 basis points relative to end-September 2021. While growth in local currency deposits decelerated to 9.4 per cent at October 2022, compared to growth of 12.9 per cent a year earlier, growth in loans and advances at October 2022 accelerated to 11.7 per cent from 7.7 per cent a year earlier.

Then last week the BOJ took the unprecedented action of publishing the deposit rates offered on savings in commercial banks in an effort to improve the flow of information to consumers on the most beneficial rates in the market.

A bank executive, speaking on condition of anonymity with the Jamaica Observer, late last week said there were talks that section 33 of the BOJ Act 1960, with amendments consolidated to 2015, could be used to compel the banks to adjust their loan and deposit rates.

Already deposit-taking institutions are starting to adjust their deposit and lending rates, even though the increases have been marginal, but they are otherwise announcing future rate increases almost daily. The BOJ said it is also anticipating “more material increases in deposit and lending rates in early 2023”. It also said that, in the absence of new shocks, “The MPC noted that its future monetary policy decisions depend on the continued pass-through effect of its past policy rate changes on deposit and loan rates.” Its future decisions on the level of interest rates is also dependent on how much retailers pass on lower prices to consumers and the Fed not exceeding its stated policy rate increases.

The Fed last week raised its interest rate target by 50 basis points and signalled further rate increases. The federal funds target rate range is now at 4.25 per cent to 4.50 per cent — its highest level in 15 years. More surprisingly, the policymakers forecast that their key short-term rate will reach a range of 5 per cent to 5.25 per cent by the end of 2023. That suggests that the Fed is poised to raise its rate by an additional three-quarters of a point and leave it there through next year.

So far, the BOJ said the level of liquidity in the financial system remains consistent with its objective of facilitating a reduction in inflation. And consumers are also expecting inflation to fall as international commodity prices decline.

Apart from keeping its key policy rate unchanged, the MPC also decided to continue containing Jamaican dollar liquidity expansion and maintaining relative stability in the foreign exchange market.

Its next meeting decision is set for the next eight weeks on February 20, 2023.