GOVERNOR of the Bank of Jamaica (BOJ) Richard Byles said he believes the country is now at a “turning point” in the fight against inflation, with data showing the risks to continued increases in the inflation rate are dissipating.

He said by December the inflation rate could fall within the 4 to 6 per cent band the central bank is mandated to achieve. If attained, that would be the first time the inflation rate would fall within the target range since it breached the upper level in August 2021 with a 6.1 per cent outcome.

The governor’s assessment came a day after the BOJ’s monetary policy committee (MPC) held the policy rate at 7 per cent, following a second-straight meeting, and announced that the cash reserve requirement (CRR) — that’s the portion of all deposits that should be held in the central bank and will be unavailable for lending — will increase on April 1 by 1 percentage point. The increase is the same amount for both Jamaican-dollar and foreign currency accounts held in deposit-taking institutions. The domestic CRR will be increased to 6 per cent and the foreign currency CRR will move to 14 per cent.

On Tuesday the central bank said that action should reduce the amount of money banks have available for lending from Jamaican-dollar accounts by $10 billion. From foreign currency accounts the reduction will be between US$44 and US$45 million.

“We are concerned that what we face in the near future is a wave of liquidity which arises mostly from seasonal government activity as well as our activity in the foreign exchange market,” Byles said of the move to hike the CRR. The action he is talking about is the central bank purchasing foreign exchange to help maintain stability.

He said over the last year the BOJ sold about US$1.3 billion to the market and select public enterprises such as Petrojam. At the same time, the BOJ bought approximately US$2.2 billion from the market, resulting in net market purchases of nearly US$940 million.

“Remember, when we buy foreign exchange we are putting Jamaican dollars in the system. And to head that off, we are raising the CRR for both Jamaican dollars and US dollars,” he said by way of explanation.

“So, it’s a pre-emptive move to stop what we see as a potential threat. Too much liquidity in the system will put pressure on the US-dollar market, and we want to pre-empt that by taking it out,” Byles continued.

Robert Stennett, BOJ deputy governor for the research and economic programming division and financial stability, told journalists that as of yesterday the level of liquidity in the system was between $14 billion and $16 billion.

“Our projection is that this liquidity is likely to rise incrementally towards the end of February, into March and April, consequent on the Government’s and the central bank’s liquidity operations,” he said, though he did not proffer a figure for what the projected level liquidity will be at by April.

What he did say, however, is that the projected level of liquidity in the financial system, if left unchecked, poses a material risk to the achievement of the inflation target, as well as to the maintenance of stability in the foreign exchange market.

For sure, the increase in the CRR is expected to push up lending rates. The BOJ said the situation will affect each bank differently and so customers won’t be affected equally.

The MPC is expected to continue to monitor the situation, first to assess if the impending increase in the CRR is working as desired but also to be ready to take action, if necessary, to ensure that nothing derails the forecast for the inflation rate to continue declining this year.

With less than two months to go for the remainder of this fiscal year, the expectation is that when final data are released in mid-April this will show the point-to-point inflation rate at between 6.75 per cent and 7.25 per cent, ahead of falling within the target band later this year and ahead of remaining there in the medium term.

That comes at a time when the central bank said its assessment is that the economy has fully recovered from the contraction caused by the COVID-19 pandemic.

An upbeat governor delivered the following appraisal:

“The inflation tendencies are heading down. Growth is good, so I think that we are at an important and positive time. This particular date should mark an important, perhaps, hopefully, turning point where we can decisively head back into that inflation corridor. We still have risks that are outside of our control: the geopolitical (as you’ve mentioned) and the impact on commodity prices. For those that are within our control, we are really determined to manage that. The increase in the CRR is precisely an effort to do that so let’s see how that works out, and let’s see what incoming data looks like to measure whether we are indeed successful.”

But still, he said there are worries.

“In a context where the domestic economy continues to grow, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation.”

Wayne Robinson, senior deputy governor, summed up the situation this way.

“The risk, we think, is material. We assess labour market conditions by doing actual surveys of businesses, asking them what have their wage increases been, what sort of wage increases do they plan to give. And we also talk to the business sector to get their sense in a more qualitative manner as to what’s happening in the labour market. And we know that there are pockets, there are certain segments in the productive sector that are facing labour market constraints; and when we try to glean what’s the sort of rate of increases [they are planning], it varies, but it is significant. Some of our surveys suggest increases, annual increases of 13 per cent upwards so we see that as a material risk — particularly if the economy continues to recover at the pace that it is currently doing.”