Bank of Jamaica (BOJ) Governor, Richard Byles, says the BOJ will be maintaining the 0.50 per cent policy interest rate on deposit-taking institutions’ (DTIs’) overnight placements, until there are “clear signs” that domestic economic activity is returning to pre-coronavirus (COVID-19) levels.
The Central Bank, on Tuesday (November 19), announced its decision to hold the policy rate unchanged, noting that this reflects the institution’s assessment that while inflation will be temporarily elevated over the next four to five months, it will remain within the four to six per cent target over the next two years.
“This revised inflation outlook is influenced by the impact of the recent flood rains on domestic agricultural supplies over the near term, as well as the ongoing impact on the economy of the COVID-19 pandemic,” the Bank said in a statement.
Speaking during the BOJ’s quarterly briefing on Thursday (November 19), Mr. Byles said the highly accommodative monetary policy stance is also being maintained to support a speedy economic recovery, once the pandemic crisis has passed.
He advised that “we will continue to monitor and assess our stance as new developments emerge”.
Mr. Byles also reassured businesses and individuals that any anticipated increase in agricultural prices “will not continue indefinitely,” adding that any breach of the inflation target “will only be temporary”.
This assurance comes against the background of the Bank’s recent track record of guiding inflation within the target range.
Mr. Byles pointed out that over the past 36 months, leading up to October 2020, inflation surpassed the upper limit of the target twice.
“This reflects a success rate of 94 per cent in keeping inflation below six per cent. As we have explained in the past, the reason for inflation going above target on those two occasions was largely related to temporary increases in agricultural prices because of droughts or floods, and these prices retreated after those events, pulling inflation down with it,” the Governor outlined.
Additionally, Mr. Byles said inflation fell below the lower four per cent band of the target on 13 occasions over the past 36 months.
“Again, these events were primarily associated with volatility in agricultural prices and declines in international oil prices which, in turn, influenced reductions in electricity and transport-related costs,” he added.
The Governor indicated that the current five per cent inflation rate for the 12-month period leading up to October 20, as released by the Statistical Institute of Jamaica (STATIN), was firmly within the target range.
He advised that the BOJ expects this trend to largely continue, despite anticipated increased consumer prices over the next three quarters.
Mr. Byles said the projections are for a 5.5-6.5 per cent out-turn for the October to December 2020 quarter, January to March 2021 – 6.0-7.0 per cent, and April to June 2021 – 4.0-5.0 per cent.
“We are, therefore, indicating that there is some risk that inflation could breach the upper end of the target range in both December 2020 and during the March 2021 quarter, an outlook that is higher than the Bank’s previous forecast I shared with you in August 2020,” he indicated.
Mr. Byles pointed out that this outlook is primarily underpinned by the impact of the recent heavy rains on agricultural supplies and prices, which is estimated to add approximately one percentage point to the inflation forecast for FY2020/21.
Additionally, he said the outlook is based on an assumption for increases in some regulated utility prices in the December 2020 and the March 2021 quarters, which, if they occur, will contribute about 0.6 of a percentage point to inflation for the fiscal year.
“We again stress that these spikes will be temporary and wish to assure that, once we get through this blip, our forecast is for inflation to remain within target over the next two years,” Mr. Byles said.