In a special briefing of journalists and analysts last week Wednesday, Central Bank Governor Brian Wynter said that he expects inflation for the full fiscal year to March to end well within his projected range of 7.5 to 9.5 per cent. Fiscal year inflation to December was 7.3 per cent. This compares with full fiscal year inflation of 13.3 per cent for the last fiscal year ending March 2010, which was also within target despite some level of scepticism at the time. Whilst he observed that he would not give a new inflation target for the coming fiscal year at the meeting, he was positive about achieving further falls in inflation this year, stating inflation would range around seven per cent in the next fiscal years, with the caveat that food and oil prices were “not subject to our policy management”.

“What we are seeing is a process of normalisation and there are more gains to be made,” Wynter, argued, referring not just to inflation but the prospect of still lower interest rates. Over a period of one year, the Bank of Jamaica’s key policy rate, the 30-day certificate of deposit, has fallen by 300 basis points (three per cent) from 10.5 per cent in January 2010 to 7.5 per cent today. The same day as the briefing, the benchmark 28 day Treasury-bill rate had fallen to a new low of 7.46 per cent, a reduction of a further two basis points over last months auction.

Wynter noted that Jamaica’s local market driven rates in both Jamaica and U.S. dollars had fallen even further than policy rates, reflecting what he repeatedly termed the “normalisation” of the “interest, inflation, exchange rate nexus”, resulting from the changing view on Jamaica’s sovereign risk and the sustainability of its fiscal deficits.

He stated that there was an “enormous amount of liquidity in the system”, with 30 day and overnight rates falling to as low as four to five per cent, as a consequence of demand for short term funds exceeding the supply. He observed this liquidity was not due to the Central Bank printing money, as all the bonds that it had purchased directly from the government over the special period of the months immediately before and after the JDX had now been sold back to the market at a premium. As a consequence, the Bank of Jamaica had actually made a profit on the transaction.

The Governor observed that net international reserves (NIR) were US$2.2 billion at the end of December (US$2.9 billion in gross reserves), and were actually double the US$1.1 billion in NIR originally programmed by the IMF a year ago (this has subsequently been revised to US$1.9 billion). The original IMF programme had factored in extensive capital flight, which had not occurred. Indeed, capital had returned due to the programme. Most importantly, none of Jamaica’s financial institutions, who had been “potentially catastrophically vulnerable” to the aftermath of the Jamaica Debt Exchange (JDX), had needed to access the U.S. $950 million financial sector stability fund that was part of the IMF programme. This would now be incorporated into the country’s gross reserves for balance of payments support.

Interestingly, according to the Governor, despite “the dramatic events of May 2010”, the financial markets saw these months as the beginning of a period of improved stability, signalled by the “very powerful appreciation of the dollar” which began in the months after the JDX and intensified in May. Indeed, anyone wanting to buy US now had easy access to foreign exchange, and the market, like the bond market, was more stable than originally planned. The news on the balance of payments side was also good, with the BOJ possessing “ample resources” to deal with the balance of payments.

Referring to our IMF programme, the Governor argued that Jamaica has had a “very successful programme to date”, outperforming its targets, although it will now have to tackle the next “wave” of reforms, including, inter alia, fiscal consolidation, privatisation, omnibus banking legislation, the upgrade of the Financial Services Commission (FSC) capability to monitor the securities sector, and the public sector generally. He expected Jamaica to pass December’s IMF test, and had his “eyes set on March”.

Admitting “people were sceptical” about Jamaica’s prospects for growth, he observed that “last year was about stability, and this year is also about stability”. Revealingly, he noted, last year, we were just “happy to get out of the crisis”.

Whilst refusing to answer how Jamaica would finance its upcoming US$400 million Eurobond payment in May, Wynter stated that this financing was “unlikely to make a difference to domestic interest rate policy”, as it “was not as closely tied as in previous periods”, referring to the past relationship between the inability to get access to foreign financing, the resultant pressure on the exchange rate, and the Central Bank response of sharply raising interest rates.

Wynter observed that the government was well ahead of its IMF targets in terms of the critical issue of the government’s overall borrowing costs. He observed that one year on, they were clearly closer to boundary limit of how low Jamaica’s domestic interest rates could go, but seemed to suggest that there may still be some room for further reductions.