The Bank of Jamaica (BOJ) is maintaining its policy interest rate at 0.50 per cent per annum for at least another month.
The BOJ’s policy interest rate is the rate the bank offers to deposit-taking institutions on overnight placements. The decision by the BOJ to hold its policy rate unchanged is based on its continued view that monetary conditions are generally appropriate to support inflation remaining within the target of 4.0 per cent to 6.0 per cent over the next two years.
However, the BOJ has emphasised that the economic outlook for Jamaica remains highly uncertain in the context of the ongoing COVID-19 pandemic. The BOJ, in making the announcement, said it will continue to assess incoming data and stands ready to implement other policy measures, if the need arises.
The next policy announcement will be made on August 18, 2020 at which time the BOJ will decide on whether to maintain the rate or tweak it up or down given the prevailing economic conditions.
INFLATION
Annual inflation at March 2020, as reported by the Statistical Institute of Jamaica, was 4.8 per cent, lower than the 6.2 per cent at December 2019 and firmly within the target range. Underlying or core inflation, which measures the change in prices excluding agricultural food and fuel prices, remained relatively low at 3.3 per cent.
In its latest monthly economic assessment for May 2020, the BOJ’s forecast is for inflation to average 4.4 per cent over the next two years. The forecast was mainly predicated on the impact of the COVID-19 pandemic, which was expected to induce a deceleration in agricultural food prices and a decline in energy and transport related costs.
In addition, the forecast included the impact of administered price increases. The BOJ’s current assessment is that inflation is likely to be slightly higher than previously projected over the forecast period but is still expected to track within the target range of 4.0 per cent to 6.0 per cent.
According to BOJ’s monthly policy rate announcement released on Monday, “this updated view of the inflation outlook stems from expectations for higher agriculture prices as well as higher energy and transport costs, compared with the Bank’s earlier forecast. The BOJ said that upward price pressures could emanate from higher than expected aggregate demand, consistent with an earlier than expected reopening of the economy as well as a more expansionary fiscal stance”.
OTHER ECONOMIC VARIABLES
In its May 2020 assessment, the BOJ’s forecast is that for the current fiscal year (June 2020 to March 2021 quarters), the Jamaican economy would contract by 5.1 per cent. In the following year (up to the March 2022 quarter), the Jamaican economy is projected to partially recover, with real Gross Domestic Product (GDP) growth in the range 2.5 per cent to 5.5 per cent.
The BOJ reports that the projected fall in real GDP in FY2020/21 is expected to be mainly reflected in hotels and restaurants, mining, wholesale and retail, transport, storage and communication and other services. These expected declines are largely based on the adverse impact of the global COVID- 19 pandemic on travel, production, distribution and entertainment activities.
The BOJ’s current assessment suggests that the risks to the forecast for GDP are slightly skewed to the upside, hinting at the possibility of a better than previously anticipated outturn. The Government’s announcement of the reopening of Jamaica’s international ports to incoming passengers in June is a key development that could contribute to improved growth prospects for the economy and is supported by the prospects of stronger economic activity in the USA.
DOWNSIDE RISKS
However, material downside risks to economic activity remain. The BOJ in its May assessment contends that the current account deficit (CAD) of the balance of payments is projected to deteriorate to 7.5 per cent of GDP for FY2020/21, mainly due to the forecast of a sudden stop in visitor arrivals due to the closure of borders to visitors until September 2020, as well as a significant decline in remittance inflows.
The CAD is projected to improve gradually over the medium term. Given recent developments, particularly the earlier than anticipated reopening of Jamaica’s borders in mid-June 2020 and a stronger performance of remittance inflows, the CAD could likely be lower than previously anticipated.
In concluding, the BOJ, which is Jamaica’s Central Bank, says it remains committed to ensuring that inflation remains low and stable within its target, and at the same time underscored that it is prepared to take all necessary actions to ensure that Jamaica’s financial system remains sound.
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