Bank of Jamaica walks an intriguing policy tightropeSunday, November 21, 2021
Seemingly comfortable in its recently acquired independent skin, the Bank of Jamaica (BOJ) has indicated a willingness to walk a policy tightrope that is intriguing but tricky at the same time.
The central bank, rattled by the fact that inflation smashed through its sacred four per cent to six per cent policy interest rate target four months ago, to arrive at 6.1 per cent, struck back on October 1 by adding a percentage point to the overnight interbank rate it pays on cash being held for banking or deposit-taking institutions.
Mr Richard Byles and his team followed that up with measures to restrain Jamaican dollar liquidity expansion, hoping to ensure that further movements in the exchange rate do not threaten the inflation target.
The bank noted that recent significant increases in international commodity prices and shipping costs have had a higher than expected pass through to local prices and have contributed to further increases in inflation expectations.
It foresaw that consumers would also be faced with higher prices for agricultural commodities as a result of the passage of tropical storms Grace and Ida in August 2021, and which may also contribute to a worsening of inflation expectations.
Anticipating that the fight was not by any means over, the BOJ made it clear it was prepared to continue to reduce the level of monetary accommodation at subsequent policy meetings by increasing its policy rate.
The interest rate hike, the bank's biggest move in 13 years, frightened some elements of the private sector and the Opposition People's National Party (PNP). The fear was that it risked pushing up bank lending rates, further limiting credit to the productive sectors, and hiking household credit through higher interest rates on consumer loans for cars, credit cards, mortgages and the like — in a word, poverty-inducing.
Governor Byles hit back: “While the decision to increase the policy rate will impact growth in the short run, the bank… [is] concerned that if we do nothing now, and high inflation becomes entrenched, growth over the longer term will be adversely affected.”
Last Wednesday, the bank doubled down on its position by raising the interest rate to two per cent, clearly believing that what it had seen in its crystal ball had come to pass and proved that its actions had been clear-eyed.
While Dr Nigel Clarke, the finance minister, publicly kept out of the fray, the conservative International Monetary Fund gave the central bank confidence-boosting comfort by openly endorsing its decision.
It can be argued that the central bank is facing its sternest test since gaining its independence. As with all things economic, decisions that have to be based on projections of future development will always risk going haywire.
The critics will see the bank's actions as inflexible, lacking in imagination and following the trajectory of economic policy orthodoxy. They will point to other countries, like South Korea, Singapore, and China, that have achieved high and sustained rates of economic growth by adopting reflationary monetary and fiscal policy.
The BOJ has very little room in which to manoeuvre, given the dreadful beating the economy has taken from the novel coronavirus pandemic. Supply chain difficulties and continued devaluation may be its biggest enemies in the short term.
For Jamaica's sake, we hope the central bank is right.