Monday 24 June, 2019

BOJ lowers interest rates

The expected outcome is that the lowered interest rates will be passed on to consumers who will then spend or invest the money, triggering an increase in economic activities.

The expected outcome is that the lowered interest rates will be passed on to consumers who will then spend or invest the money, triggering an increase in economic activities.

The Bank of Jamaica (BOJ) has announced a reduction in the rate offered on over-night placements to financial institutions by 25 basis points to 1.75 per cent.

The reduced rate is aimed at stimulating a pick-up in the number of people accessing loans, in response to risks that Jamaica’s inflation could fall below 4.0 per cent at December 2018, according to a statement from the central bank.

The expected outcome is that the lowered interest rates will be passed on to consumers who will then spend or invest the money, triggering an increase in economic activities.

In its statement, the BOJ noted that the decision reflects the Bank’s most recent assessment that inflation could fall below the lower limit of the 4.0 per cent to 6.0 per cent target in the latter half of 2019 and early 2020.

But when inflation is too low, it could raise the risk of Jamaica falling into deflation, in which the nominal wages and the prices of consumer goods and services decline on average,” the BOJ said, noting that deflation is associated with weak economic conditions.

According to the BOJ, a report from the Statistical Institute of Jamaica showed that Jamaica’s inflation rate at November 2018 was 4.1 per cent, lower than the 4.7 per cent recorded at October 2018 and the 4.9 per cent at November 2017.

Projections are that inflation will move to the upper end of the 4.0 per cent to 6.0 per cent target by June 2019 and trend thereafter to the middle of the target range.

One of the main downside risks to the November 2018 forecast that would cause inflation to be lower than projected was that international oil prices could be lower than anticipated. 

"Those downside risks have since materialised, with crude oil prices for October and November 2018 falling significantly below the bank’s forecast,” BOJ said.

BOJ reasoned that the projected increase in inflation over the short term was expected to emanate from continued improvements in domestic demand and increases in utility rates, on assumptions that international oil prices would remain elevated for the next two quarters.

However, projections that oil prices will remain at their current low levels - approximately 30 per cent below the previous forecast - intensifies the risk of inflation breaching the lower limit of the bank’s target over the near term.

Additionally, declines in domestic agricultural prices, associated with an expected recovery in crop production in the December 2018 quarter, could also intensify this risk over the very short term, the Central Bank said.

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