BOJ executes third rate hike, expects inflation to breach target well into 2022
Published:Monday | December 20, 2021 | 8:33 PM
The Bank of Jamaica on Monday increased its key interest rate by 50 basis points to 2.5 per cent, in continued defense of its inflation target.
Annual inflation fell in November to 7.8 per cent, down from 8.5 per cent in October, but the rate is still nearly three percentage points outside the upper end of the target range of 4 to 6 per cent.
The central bank is forecasting that inflation won't return to the target range for another eight to 10 months, that is, up to midsummer 2022.
The December 20 decision is the third upward adjustment in interest rates since September, and the BOJ Monetary Policy Committee, MPC, is telegraphing that more increases are likely. The policy rate was increased from its historic low of 0.5 per cent to 1.5 per cent at the end of September, then to 2.0 per cent in mid-November and 2.5 per cent on December 20.
The Jamaican dollar, meanwhile, has been losing value, making goods and services more costly to procure for businesses and more expensive for Jamaicans to consume. The BOJ is concerned that the currency's volatility could also affect the inflation target. The JMD is now trading at around $154 to $155 relative to the US dollar, near its historic highs.
"Accompanying this rate increase, the bank decided to maintain other measures to contain Jamaican dollar liquidity expansion and to ensure that further movements in the exchange rate do not threaten the inflation target," the BOJ said.
The risks to the inflation forecast are assessed to be skewed to the upside ...", the central bank said, while listing the upside risks as stronger pass-through of international commodity and shipping prices to domestic prices, higher inflation among Jamaica’s main trading partners and the impact of adverse weather on agricultural food prices, among others.
"The MPC’s action was therefore necessary to limit the second-round effects of the commodity price shocks and to guide inflation back within the target range over the next two years," BOJ said.
The next interest rate decision is scheduled for February 18.
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