Factors Influencing Inflation Rate Shortfall Outlined

Finance and Public Service Minister, Dr. the Hon. Nigel Clarke, today (August 22), released official correspondence from the Bank of Jamaica (BoJ) outlining the factors resulting in Jamaica’s inflation target shortfall as at June 2018.

In September 2017, the Government set a medium term inflation target of 4.0 to 6.0 per cent, to be achieved and maintained by the BoJ from April 2018 onwards.

However, between April and June 2018, the 12-month rate fell below the lower 4.0 per cent band.

It is against this background, that the BoJ was required to explain the reasons for the deviation to the Finance Minister and nation, and outline the actions being taken to rectify the anomaly.

According to the BoJ correspondence, which was issued during a press briefing at the Ministry, the lower inflation out-turn, as at June 2018, primarily reflected the impact of a stronger than anticipated reversal in agricultural prices in the March 2018 quarter; lower than forecasted inflation; and a reduction in the pass-through of oil prices to inflation.

Additionally, domestic demand conditions were assessed and determined to be weaker than originally expected.

The document further notes that while the BoJ projects that inflation for the September and December 2018 quarters will remain close to 3.5 per cent (just below the target’s lower limit and band limit of the Monetary Policy Consultation Clause), inflation will rise to the initial target’s midpoint by June 2019, and broadly remain at that level over the medium term.

Speaking at the briefing, Dr. Clarke emphasised that “it is absolutely essential that the people of Jamaica understand the Central Bank’s thinking on inflation and on the monetary policy tools and choices that they have at their disposal.”

He further stated that the disclosure is consistent with the Administration’s move to create an autonomous Central Bank, while reiterating that the Government intends to table legislation in October to boost the BoJ’s independence.

“As we move in that direction, I believe that relevant information is essential to the proper functioning of markets… and the greater the transparency we have with respect to official data, the better markets will function and perform in Jamaica,” the Minister added.

Mr. Wynter, who also spoke at the briefing, said the core reasons for the lower inflation out-turn at June 2018 are temporary.

“We expect this to reverse and get back to the normal rate, which is around a half a per cent a month, and that translates to roughly five per cent a year,” Mr. Wynter said.

Noting that the rate of inflation is impacted by a range of variables, the Governor indicated that “there are things we can do, by using our policy levers to affect it.”

“So when they say it is already correcting, it is adjusting back up, because most of the components that caused it to be below target are temporary factors and those temporary factors are already correcting,” Mr. Wynter stated.
The Governor cited, as an example, agricultural prices which, he noted, fell and were “very low”.

“Prices had shot up in the previous period because of the weather-related shocks to agriculture (which) created a problem. When agriculture recovered, crops came back in (and) the prices fell.

That is not a permanent thing. Prices are going to keep going up and already there are reports relating to the drought conditions that (are) going to have an impact on agricultural prices,” Mr. Wynter added.

Other factors expected to impact the inflation rate include: higher oil prices and higher domestic gross domestic product (GDP) growth, the latter driven, in part, by the accommodative monetary conditions introduced by the BoJ over the past year.