AMIDST several related shocks, including the war in Ukraine, the continuing novel coronavirus pandemic, elevated energy prices, soaring inflation and a climate crisis, there is a crescendo of doom and gloom across the globe as financial markets tighten, economic growth slows, inequality widens, poverty deepens, and social unrest spreads.

And while it is generally agreed that inflation and inflation expectations risk becoming de-anchored, not everyone is sold on the “great tightening” of monetary policy by central banks generally except in advanced economies more particularly, led in the main and most aggressively by the US Federal Reserve. As The Economist puts it, the Fed “calls a tune which others must follow, like it or not”.

In a very general sense, there are two schools of thought on monetary policy or two types of birds — hawks and doves, as the adherents are often referred to. While hawks seek to tighten monetary policy by increasing interest rates, doves favour a more accommodative, easy money policy of keeping interest rates lower for longer. Both claim to be concerned with macroeconomic stability, growth and prosperity.

At the level of global institutions, the International Monetary Fund (IMF) — a tool of US foreign policy — is the world’s foremost hawk. The UN, represented by UNCTAD — an intergovernmental organisation intended to promote the interests of developing countries in world trade — is the world’s leading dove. Neoliberal critics of UNCTAD often refer to it derisively as a “relic of development economics”. The IMF is not short of detractors. An important point worth bearing in mind is that the allocation of money — its supply, demand and price (interest rate) — is a political issue. It is concerned with power and interests. It is about who gets what, when, where and how much.

In its World Economic Outlook (WEO) published last week, the IMF argued that by squeezing real incomes and undermining macroeconomic stability, inflation remained “the most immediate threat to current and future prosperity”. Central banks, it said, were “laser-focused on restoring price stability” and that the pace of tightening had accelerated sharply. There were, the fund argued, risks of both under- and over-tightening. “Under-tightening would entrench further the inflation process, erode the credibility of central banks, and de-anchor inflation expectations. As history repeatedly teaches us, this would only increase the eventual cost of bringing inflation under control. Over-tightening risks pushing the global economy into an unnecessarily harsh recession.”

According to the fund, over-tightening is more likely when central banks act in an uncoordinated fashion and financial markets may have difficulties coping with too rapid a pace of tightening. It went on to say that misjudging the “stubborn persistence” of inflation could prove detrimental to future macroeconomic stability by undermining the hard-won credibility of central banks. It concluded: “As economies start slowing down and financial fragilities emerge, calls for a pivot toward looser monetary conditions will inevitably become louder. Where necessary, financial policy should ensure that markets remain stable, but central banks around the world need to keep a steady hand with monetary policy firmly focused on taming inflation.”

In summary, the hawkish IMF is strongly of the view that “front-loaded and aggressive” monetary policy must “stay the course to restore price stability, to avoid inflation and inflation expectations becoming de-anchored, and to prevent widespread recession and disorderly adjustments in global financial markets”.

The view of UNCTAD is diametrically opposed to that of the IMF. In its Trade and Development Report 2022, issued a few days before the WEO, it warned that “monetary and fiscal policy moves in advanced economies risked pushing the world towards global recession and prolonged stagnation, inflicting worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020”. The global slowdown will affect all economies, it argued, but developing countries were most exposed to “the cascade of debt, health and climate crises”.

Pointing out that middle-income countries in Latin America and low-income countries in Africa could suffer some of the sharpest slowdowns this year, it noted that a pace of growth of less than three per cent for developing countries, as appeared certain, was “insufficient for sustainable development and [would] further squeeze public and private finances and damage employment prospects”.

“In a decade of ultra-low interest rates, central banks consistently fell short of inflation targets and failed to generate healthier economic growth. Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is,” the report warns, “an imprudent gamble.”

UNCTAD has called on central banks in developed economies to change course and “avoid the temptation to try to bring down prices by relying on ever higher interest rates”.

Madame Kristalina Georgieva, managing director of the IMF, says she agrees with Madame Rebeca Grynspan, secretary general of UNCTAD, that developing countries which were being hit should be helped.

In Jamaica, the hawks are readily identifiable. They include Richard Byles, governor of the Bank of Jamaica (BOJ); Dr Nigel Clake, the finance minister; Dennis Chung; and Dr Damien King.

The doves, unlike their international feathered friends, are a motley crew of predatory bankers, rent seekers, speculators, dismal scientists, privateers and Opposition politicians. What they want is not low interest rate but low deposit rates; what they desire is not development but increased profit and rent; and what they cherish most is licence. They want unrestricted freedom to charge whatever they want, to pay as little as possible, to avoid and evade taxes, and to formulate and determine public policy for their private benefit.

For a decade, as UNCTAD noted, they engorged themselves on ultra-low interest rates producing anaemic growth, deepening poverty, widening inequality, inflated asset prices, low wages and ginormous profits. They want a return to 0.5 per cent interest rate, not because they care about growth as they claim or about the misery that high interest rates will impose on heavily indebted households but because of what a high interest rate risks doing to their inflated assets.

Were they ever concerned about asset price inflation? Hardly. They relished the boom. They celebrated the fantasy of the best stock exchange in the world. Can they be reasonably expected to do anything differently if the BOJ were to revert to an easy money policy? Definitely not.

Truth be told, the BOJ’s monetary policy, while being “normalised” (a term the IMF uses), is still quite accommodative to bankers whose profits have soared in line with increases in the policy rate. For them, nominal interest rates remain comfortably low in relation to the rate of inflation. And the banks quite conveniently have ignored the policy signals of the governor to increase deposit rates while pushing up lending rates and bank charges, thereby increasing spreads and their profit margins. The tightening has coincided with a dramatic surge in bank cash balances, especially of foreign currency holdings, further reduction of lending to the productive sector, skyrocketing household debt, and growth in the volume and margins of bank profits.

In August 2018, while the monetary policy rate was falling, the Jamaica Manufacturers and Exporters Association (JMEA), which lists itself amongst the doves — recently describing the BOJ’s action to increase the policy rate as “reckless” — accused the banks of “extortionate, anti-development lending practices”. It said: “Local commercial banks, especially, seem to be more interested in boasting [about] double-digit increases in revenues and net profits but demonstrate blatant disregard for the development needs of the country.”

It went on: “The JMEA continues to urge these institutions to play their role in advancing the nation’s objectives by actively reducing the mark-ups they currently employ. Financing for our agricultural, manufacturing and service sectors can be substantially lower than it is currently. Uncompetitive interest rates persistently impede Jamaica’s competitive advantage and cripple our local productive sectors as they try to gain a foothold in global markets.

“It is our expectation that with broader economic certainty, new entrants into the banking sector, declining BOJ interest rates and a low inflation rate, spreads would be declining and not be on an upward trajectory.”

In December 2021 Gassan Azan, one of Jamaica’s largest importers and distributors who two years earlier had boldly proclaimed that he was feeling “very bullish” about Jamaica’s economic performance, that interest rates were on a steady decline, and that “people could actually go into the banks and borrow money”, bemoaned what he called the “lip service” being provided by the banks to the agricultural sector. Poor Azan. Did he not listen to what Mr Metry Seaga of the JMEA had to say about the banks in 2018? Perhaps because distribution was one of the things the banks loved to finance and Azan himself was such an astute businessman with a good, solid reputation, he thought obtaining financing for his agricultural project would be a cinch.

Lisa Hanna, MP and Opposition spokeswoman on foreign affairs and foreign trade who at one time appeared to be a hawk — at variance with her party’s dovish position — and who told the governor in Parliament last year that she had been surprised that he had not raised interest rates earlier, has now joined the private sector as had Mr Julian Robinson, the People’s National Party’s spokesman on finance, to caution the BOJ against further interest rate increases.

Arguing that inflation in small, open, dependent Jamaica is primarily imported and that therefore the BOJ has no influence over the factors causing it, Ms Hanna asserts that any further increase in interest rates will “hamper people from buying goods and services, thereby reducing growth in the economy”.

“More significantly,” she contends, and not without merit, “high-interest payments will invariably drive up other costs to consumers already experiencing trouble making ends meet. [The] focus,” she argues, “should be on continuing to grow [the] economy, [and] two of the best ways to achieve this goal are to give small and medium-sized businesses access to capital at low interest rates and provide low mortgage rates to encourage homeownership and growth in the construction sector.”

But surely Hanna, and her party whose position she now seems to be articulating, would know that micro, small and medium enterprises (MSMEs) have not, in the past, benefited from low interest rates; that low mortgage rates and, in consequence, homeownership favoured the wealthy few; that low interest rates contributed to an explosion in asset price inflation; and that while there was a boom in the stock market and growth in the construction sector, growth in the real economy has been as miasmic as a Biafran pickney, as one member of her party was fond of putting it.

As the IMF has noted, “Overall, the formal credit environment in Jamaica appears to support access to credit for consumers and corporates, but not micro, small and medium enterprises.” Moreover: “Although bank lending to consumers is expanding…most lending to the MSME sector is taking place via still-unregulated microfinance institutions… and credit unions which lend to medium-sized corporates, [which are] also not fully regulated.” In other words, while the BOJ provided easy money through the banks to households and the well-to-do private sector, the MSME sector went bankrupt, farmers were denied access to credit, household debt soared, asset prices bubbled up, and economic growth remained anaemic.

The economy and the people of Jamaica have been hurt by high interest rate policies before; they are feeling the additional “economic pain” of global tightening now. But nor has a long period of low interest rate done them any good. What it has in fact meant is socialism for the wealthy few and austerity for the impecunious many.

The choice facing the country needs not be a binary one between high and low interest rates or between tight money and easy money. What the country needs is a guided interest rate policy — by a fit-for-purpose BOJ — to direct resources towards productive uses, to generate growth and development, and to build ecological resilience; the use of the National Housing Trust to expand the affordable housing stock, thereby deflating the housing bubble; the placing of restrictions and increasing the taxes on the ownership of multiple properties; the revision of the property tax regime to take greater account of improved land value; the setting of limits on the proportion of banks’ portfolio available for household loans; targeted household debt restructuring and cancellation; and a special tax on super profits of banks. But let there be no illusion. That would require courage and political leadership and much else besides. Jamaica could not act alone.

China has a dual-track interest rate regime in which deposit and lending rates are regulated while money and bond rates are determined by the market. And the European Union, which has begun to tighten its accommodative monetary policy stance through its targeted, longer-term refinancing operations, provide banks with long-term funding at attractive conditions to stimulate bank lending to the real economy.

The hawks are ascending, the doves are squirming, and the governor — having returned from the annual IMF/World Bank meetings in Washington a certified vocalist — is determined to stay the course. However, anywhere the wind blows, the banks, which have captured the State and have politicians by the short and curlies, are as cool as a cuckoo. The Jamaican people will continue to feel the burn and the economy is unlikely to escape unscathed from the great tightening.

— Ambassador Emeritus Audley Rodriques served as Jamaica’s envoy to Venezuela, Kuwait and South Africa.