The great tightening — impact of rising interest rates on the Jamaican economy
BOJ Governor Richard Byles.

On September 21, America's Federal Reserve (the Fed) in continuation of a determined effort to tame inflation no matter the cost, increased the federal funds rate by three-quarters of a point, to between 3.00 and 3.25 per cent, the highest level in 15 years.

Fed Chairman Jerome Powell, who has promised further rate increases, said previous rate hikes had not done the job of reducing inflation; that the chances of a soft landing for the American economy were decreasing; and that Americans should expect "economic pain". Unemployment is expected to rise from 3.7 per cent this year to 4.4 per cent in 2023, as workers will be made to feel the burn to bring inflation down.

A week later, on September 29, The Economist, a British newspaper, published an article titled "The great tightening" in which it argued that the unprecedented, rapid and synchronous rise in global interest rates puts the world economy at risk of a "historic" slowdown. It said the probability that any economy would emerge unscathed from the experience of spiralling interest rates was lowering.

The same day The Economist published its article, the Bank of Jamaica's Monetary Policy Committee (MPC), which meets roughly every six weeks to determine the price, quantity and allocation of Jamaican money, or who gets what, when, where and how much, decided to increase the bank's policy rate by 50 basis points from 6.00 to 6.50 per cent. This was in continuation of Jamaica's "great tightening" which had begun in October 2021 when the MPC tripled the monetary policy rate from 0.5 per cent to 1.5 per cent to, it said, contain inflation, which had broken through its four to six per cent target range.

There was some weeping, wailing and gnashing of teeth as the beneficiaries of the bank's accommodative monetary policy became concerned that it would too tightly restrict their access to the easy money to which they had grown accustomed. The governor was accused of acting "irresponsibly". A year later, and after a 13-fold increase in the policy rate, which now stands at 6.5 per cent, price inflation, officially at 10.2 per cent, is unrelenting and monetary policy is deadlocked, disconnected and disconcerted.

By tightening monetary policy, the bank says it intends to make saving in Jamaican dollars more attractive, mop up excess liquidity, stabilise the Jamaican dollar and reduce spending thereby containing inflation. However, interest rates on Jamaican dollar deposits have hardly budged, as the governor himself has acknowledged. In fact, since last October, the average deposit rate increased by a paltry 37 basis points. Somebody is benefiting from the increased interest rate; it is clearly not the lowly deposit holder. The governor must know why this is the case. Meanwhile, loan rates (principally to the household sector) have increased significantly but by how much, the bank has not said. And foreign currency assets have soared.

Surely, the governor knows that gradually raising policy rates at a pace much slower than that of inflation effectively means a fall in real interest rates. If he is to keep inflation expectations in check, discourage forex holdings and reduce inflationary pressures, he will have to significantly increase the real policy rate. This will mean forcefully withdrawing the easy money soother from the mouths of the Lost Boys of Neverland, this island paradise. Is he able and willing to do so and what will be the consequences?

While there is much talk of price inflation, as there should be, nary a word is being uttered about asset inflation, the housing bubble and the nefarious activities taking place at the sweetie shop, as the minister of finance once described the Jamaica Stock Exchange. And he would know, as he once sold lollipops there. Money is still easy, deposit rates remain extremely low, loan rates extortionate, bank charges oppressive and the predatory, anti-development banks, which run things, hustling and scamming more than ever before, their profits ginormous, refuse to be guided by the governor, who is one of their own yet claims independence from external influence.

Of course, tightening monetary policy to contain inflation will reduce the value of assets, including luxury town houses and apartments in St Andrew and the candies traded at the sweetie shop on Harbour Street — many of which were acquired when interest rates were low (they still are for some) and praedial larcenists were allowed to freely pluck the low-hanging fruits from the easy money tree at the bottom of East Street. To say nothing of the deleterious effect on already anaemic growth, the harm to public debt and the impact on the poor, the vulnerable and heavily indebted households.

As a country, Jamaica, weak, open, dependent and misled, is in a lot of trouble. (However, a wonderful time is being had by the few.) The spillover from US tightening has washed up on its shores. It is feeling quite a bit of the "economic pain" being inflicted on America by the Fed. And it had been enduring severe pain before. The bitter medicine of austerity for the impecunious many and free easy money for the wealthy few of the last decade have brought the country nothing but grief.

The Fed "calls a tune which others must follow, like it or not. The dollar's outsized sway in the global financial system grants it a powerful role in driving global financial cycles," The Economist reports. "The Fed's commitment to returning American inflation to two per cent leaves it little room to accommodate other economies. It may welcome rate rises elsewhere as a helpful contribution to America's inflation fight, even if countries begin falling like dominoes into recession." The consequences for Jamaica, including a decline in remittances, capital flight, fall in FDI, repatriation of profit, drop in tourism, devaluation of the Jamaica dollar, shrinking net international reserves, are legion.

And while the Government talks unconvincingly of recovery, growth and reduced unemployment, people are experiencing a much different reality, one of hardship and despair. Dr Nigel Clarke, the smart, delusional and denialist finance minister, lacking the wisdom of a heart, insists that while emerging markets are in turmoil, Jamaica's financial market is performing better than those of regional peers such as the Dominican Republic and Trinidad and Tobago.

Jamaican bond prices are trading well above the country's credit rating in spite of the global tightening, he claims. The Jamaican dollar is strong and the likelihood of a foreign exchange crisis is remote, he avers. Jamaica is not a "basket case", he confidently asserts, the sound policies have paid off. Only once has he ever let slip a hint of concern that if inflation were not contained, there would be economic ruin. People are suffering, Dr Clarke, in case you haven't noticed.

But despite all the toxic positivity from the minister, the "independent" governor is pessimistic, forlorn and depressed. The lovely little ditty about low, stable and predictable inflation that would coax a pleasing jig from Madame Georgieva, she of the International Monetary Fund, is no longer being sung by him.

He is not as fantastical as we have known him to be. Hear him: "This more aggressive [tightening] stance [by the Fed] could result in US dollar assets becoming more attractive relative to those denominated in Jamaican dollars, which could cause capital outflows, prompting a faster pace of exchange rate depreciation and, consequently, a derailment of the bank's efforts to manage inflation." Say what? Why the negativism from Pollyanna? Perhaps, he is experiencing what Prime Minister Holness calls "exogenous shock", manifested in a feeling of "greater sense of pessimism, negativism, an unexplainable sense of depression".

The governor would have noticed that global growth expectations are falling rapidly. The latest forecast published by the Organisation for Economic Co-operation and Development (OECD) on September 26, indicates that global gross domestic product (GDP) will rise by three per cent this year, down from the 4.5 per cent it projected in December last year. In 2023 it expects growth of only 2.2 per cent. A global slowdown may not result in a weaker dollar, the OECD warns, as investors and speculators flee to the relative safety of the global reserve currency, pushing up its price.

According to the IMF, which is preparing to deliver a gloomy world economic outlook later this month, the main risks to Jamaica's financial system are from natural disasters, the tightening of global financial conditions, and the possible reversal of fiscal discipline driven by "reform fatigue".

A tightening of global financial conditions could reduce foreign inflows including remittances, which would dampen economic growth and lead to rising non-performing loans, the IMF warns. A significant rise in FX non-performing loans associated with currency movements would require increased "provisioning", fund speak for a bail out with public funds. A natural disaster would cause protracted negative growth and large losses for banks and other financial institutions, it said.

The BOJ admits that the financial sector and its payments system would be badly harmed, if a natural disaster were to occur. We have seen the enormous damage that a little flooding (or drought) can inflict and how vulnerable and unprepared the country is to weather events. People have become "reform fatigued" tyad, fed up, cross, angry and miserable. Long simmering social and political discontent is boiling over and protests, growing in size and intensity, are taking place more frequently. Crime, the 'Commish', Antony Anderson tells us, is on the rise with murder up by eight per cent.

Jamaica's corner is dark. Dreams are being shattered. Bubbles will burst. Those who can are making good their escape from the economic pain.

Ambassador Emeritus Audley Rodriques headed Jamaican missions in Venezuela, Kuwait, and South Africa.

ANDERSON ... murders up eight per cent.
Prime Minister Holness calls it 'exogenous shock'.
CLARKE... insists that Jamaica's financial market is performing better than those of regional peers such as the Dominican Republic and Trinidad & Tobago.
Cover of a publication of The Economist earlier this year.
Audley Rodriques

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