Sunday 15 September, 2019

BOJ slashes policy interest amid worries about inflation

The Bank of Jamaica (BOJ) has announced that effective Monday, May 20 it will lower the policy interest rate (the rate offered on overnight balances with the central bank) by 50 basis points to 0.75 per cent.

The decision is two-fold according to the central bank. It is aimed at stimulating a faster expansion in private sector credit which should lead to higher economic activity, consistent with the bank’s inflation target.

“This action will (also) support inflation returning more quickly to the centre of the target,” the BOJ said.

According to the central bank, the decision reflects its assessment that, while inflation is expected to increase to an average 4.5 per cent over the next eight quarters, there will be months when inflation will fall below the lower limit of the bank’s target of 4.0 per cent to 6.0 per cent in the context of low underlying inflation.

“The forecast is for inflation thereafter to approach the midpoint of the target gradually but at a slower pace than previously expected at the last assessment in February 2019,” the BOJ said in a statement on Friday.

The announcement by the BOJ on Friday, came two days after it indicated that it would be reducing the cash reserve requirement for deposit-taking institutions by a further two percentage points to 7 per cent, effective June 3.

The resulting effect is that there will be more money available for banks to lend to businesses and households at more competitive interest rates.

The BOJ said that decision was taken based on the entrenchment of macroeconomic conditions in Jamaica. That decision was expected to increase liquidity in the financial system by $12.3 billion and thereby support the expansion of credit to businesses and households at lower rates and on better terms.

The BOJ has previously lamented that commercial banks were not reducing interest rates in line with its lowering of the cash reserve requirement to facilitate the reduction.

In lowering the policy interest rate as of Monday, the BOJ was mindful that inflation continues to run below target. It noted that annual inflation as at April 2019 reported by the Statistical Institute of Jamaica was 3.9 per cent, up from 3.4 per cent at March 2019 and 3.2 per cent at April 2018.

“While annual inflation has been rising, underlying inflation remained low,” the bank said.

It said it “anticipates that inflation will rise towards the mid-point of the target by the March 2020 quarter as (i) domestic agriculture prices increase from the low levels of recent months to more normal levels and (ii) domestic economic activity increases in response to the lowering of the policy rate over the last eight quarters.”

However, the bank also noted that inflation is not expected to stay at the mid-point of the target but will decline towards the bottom of the target in the period after the March 2020 quarter and only return to the mid-point slowly over the ensuing three years.

It also cautioned that this outlook carries a material risk that inflation will fall below the target again during that period in the absence of a policy response.

The BOJ said the projected trajectory of inflation is lower than it previously forecasted. It said this is reflective of its view that inflation expectations are lower than previously assessed and the projected pace of expansion in domestic demand in the period after the March 2020 quarter will be slower due to headwinds from the global economy.


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