Photo by Pedro da Silva
The Bank of Jamaica (BOJ) is facing widespread criticism over its decision to increase the key policy rate in a bid to curb inflation.
After inflation broke through the upper limit of the 4% to 6% target in August to reach 6.1%, the BOJ had signalled its intention to increase interest rates, but there was uncertainty about the size of the increase.
In one of its most significant moves since the passage of new legislation which increased central bank independence, the BOJ announced that it was adding a percentage point (100 BPS) to the overnight interbank rate it pays on cash it holds for banking or deposit-taking institutions.
The increase, which is the first such change in 13 years, aims to “moderate” the economy’s growth potential given fears of continued inflation.
However, the rate increase has the potential to also increase bank lending rates that could further limit credit to productive sectors, and hike household credit through higher interest rates on consumer loans for cars, credit cards and mortgages.
“While the decision to increase the policy rate will impact growth in the short run, the Bank and the Monetary Policy Committee (MPC) are concerned that if we do nothing now, and high inflation becomes entrenched, growth over the longer term will be adversely affected,” said BOJ Governor Richard Byles.
Though the BOJ recently revised its growth outlook to a range of 7% to 10% for the current fiscal year ending March 2022 (up from 5% earlier in the year), many are concerned that the rate increase will limit the economy’s prospects for countering the large economic contraction in the previous year.
In a media release, the Private Sector Organisation of Jamaica (PSOJ) criticised the interest rate hike, calling it “a risk to Jamaica’s medium-term economic growth prospects”. “Any movement in interest rate upwards is going to have a dampening effect on the economy. It’s going to slow down investment decisions and slow down consumer spending and also affect motor car purchases and mortgages because the cost of borrowing is going to go up,” said PSOJ President, Keith Duncan.
The BOJ said that while it understands the BOJ’s concern about a trend of inflation building, it “is of the view that there is basis for concern that the now tighter monetary policy stance — in the context of adverse macroeconomic conditions arising from the COVID-19 pandemic, the Government’s programme to maintain a fiscal surplus, and uncertainty among economic actors about short term price changes due to supply chain issues — presents a risk to Jamaica’s medium-term economic growth prospects”.
Through its Economic Policy Committee, the PSOJ urged the central bank to exercise “caution in respect of transitory inflation” which is expected to be short-lived. It called on the BOJ to expressly clarify the specific economic circumstances that would give rise to further changes in the policy rate.
The IMF’s Q3 World Economic Outlook sought to allay inflation fears by emphasising that “recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches”. The IMF also signalled that “inflation is expected to return to its pre-pandemic ranges in most countries in 2022 once these disturbances work their way through prices”.
Noting that elevated inflation related in part to high food prices, is also expected in some emerging market and developing economies, the IMF cautioned that “central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics”.
The BOJ has also come in for strong criticism from the Jamaica Manufacturers and Exporters Association (JMEA) which labelled the move as “misguided,” warning that it would “further impoverish the most vulnerable in society”.
Several regional economists have also voiced concern about the rate hike. Dr Adrian Stokes, Senior Vice-President and Head of Insurance and Wealth Management at the Scotia Group Jamaica argued that he does not “see the justification for tightening monetary conditions in a depressed economy” given that he expected the rise in inflation to be temporary.
“If you compare what’s happening in the US where they have a much stronger economy, inflation is running much further ahead of their target and the Federal Reserve there is just beginning to think about tapering, not even to tighten monetary conditions,” said Stokes referring to the mid-year US inflation rate of 5.4% compared to their target of 2%.
Meanwhile, former Opposition Senator and University of the West Indies academic, Dr Andre Haughton contended that given the structure of Jamaica’s economy and the scale of the pandemic, the BOJ should think about other objectives other that just satisfying an inflation target”.
Responding to the concerns about the impact of the policy decision, BOJ Governor Richard Byles maintained that “the suite of policy actions beginning with the modest increase in policy rate has been calibrated to minimise the adverse impact on growth”. “BOJ’s assessment, therefore, is that even with these actions, and potential future actions, GDP growth will still fall within the range of 7% to 10% for fiscal year 2021/2022,” he added.
With the hike, the BOJ has joined a growing list of economies including Brazil, Chile and Norway that have increased interest rates to curb inflation, even before more developed economies like Britain and the US. The BOJ’s mandate, as set out in the Bank of Jamaica (Amendment) Act 2020 is the maintenance of price stability and financial system stability, with price stability being the primary objective.
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