The Bank of Jamaica has been targeting higher growth and not the exchange rate

On Wednesday, Minister of Finance Dr Nigel Clarke released his correspondence with Bank of Jamaica Governor Brian Wynter over undershooting the inflation target to the press.

Both he and the governor then participated in a subsequent press briefing covered in an excellent article by Balford Henry entitled “BOJ denies manipulating the exchange rate” in yesterday’s Jamaica Observer, the gist of which has also been covered in other media. However, despite this briefing, it still appears necessary to resolve the confusion in the public’s mind over what undershooting the inflation target actually means, as well as the Bank of Jamaica and International Monetary Fund’s (IMF) policy on the exchange rate.

The principal point of confusion is the use of similar “technical” language for both “undershooting” and “overshooting” the inflation target. Jamaicans are not used to the idea, unlike advanced countries over the past decade, of inflation being below, as opposed to above target.

Inflation in Jamaica has almost always been above target, often well above, which is clearly a bad thing in almost all respects. The use of the word “breach” compounds the problem, as the imagery is of breaking a wall or perhaps an opening in the hull of a boat.

Nevertheless, the undershooting of the inflation target, which from the letters appears to be reviewed on a rolling year-on-year basis, should not be viewed in the same manner as an overshooting of the inflation rate. Over the past decade inflation rates in the developed countries have repeatedly undershot the typical target of two per cent. The main reason this was a concern for them (low inflation is after all a good thing as the governor also noted at the press conference) has been because it typically meant that the economy is, weaker than expected, and that potential growth and employment is therefore, below what it could be. The same appears to be true in Jamaica.

Both the Bank of Jamaica and the IMF have repeatedly made the point that they do not want a higher rate of devaluation to increase inflation to meet the inflation target. Jamaicans should believe them.

In the case of the Bank of Jamaica, the governor explicitly denied that they are trying to get inflation higher by manipulating the exchange rate. As he quite rightly noted, central banks like stable and predictable prices, or as he put it more graphically “we don’t want more inflation – believe me”.

http://www.jamaicaobserver.com/business-report/the-bank-of-jamaica-has-been-targeting-higher-growth-and-not-the-exchange-rate_142367