BOJ pushes policy rate to 4.5 per cent
Published:Wednesday | March 30, 2022 | 12:12 AM
The Bank of Jamaica, BOJ, late Tuesday announced its decision to again increase the policy interest rate, which is the rate offered to deposit-taking institutions on overnight placements with the central bank, by 50 basis points to 4.50 per cent per annum, effective March 30. It is the fifth rate hike by the monetary policy authority in months as it seeks to rein in galloping inflation.
The benchmark rate hike represents a ninefold rise from the record 0.5 per cent pre-pandemic low that existed for two years from August 2019 to September 2021. The BOJ changed direction at the end of September when it increased the policy rate by a percentage point to 1.5 per cent, in defence of its inflation target of 4.0-6.0 per cent. The rate moved to 2.0 per cent in November, 2.5 per cent in December, and 4.0 per cent in February this year.
The BOJ said it will make its next policy decision announcement on May 19, 2022. Its Monetary Policy Committee, MPC, the BOJ said, is prepared to take further actions at its next meeting depending on the available data.
Inflation has continued to increase, influenced by the COVID-19 pandemic and supply bottlenecks for manufacturers. Annual inflation at February 2022 stood at 10.7 per cent or more than double the lower limit of the Bank’s target range.
“The major upside risk is higher-than-projected increases in international commodity and shipping prices and their impact on domestic prices. This risk largely emanates from the invasion of Ukraine by Russia and the imposition of economic and financial sanctions on Russia by Western industrialised nations, resulting in higher volatility in international energy, commodity and financial markets. Further increases in inflation expectations stemming from the impact of the conflict on international commodity and shipping prices are also an upside risk,” according to the BOJ.
It noted that the conflict in Eastern Europe could adversely affect the country’s tourism industry and related services and worsen already impaired supply chains. In addition, new waves of the COVID-19 virus and the impact of higher inflation on real incomes, it said, could negatively affect both domestic and external real GDP growth.
“The risks to the inflation forecast are assessed to be skewed to the upside,” the BOJ concluded.
The BOJ rate hikes are, in turn, expected to create a ripple effect with banks raising their retail lending rates across the economy. Saving rates, which, in principle, should also go up, are usually slower to move. The latest BOJ rate hike follows rate increases also in March by the Bank of England and the US Federal Reserve Board.
The BOJ said it also decided to continue pursuing other measures to contain Jamaican dollar liquidity expansion aimed at limiting the second-round effects of the ongoing and protracted commodity price shock and guide inflation back to the target range of 4.0-6.0 per cent over the next two years.
These measures, the bank expects, will cause liquidity conditions to remain tight and interest rates on deposits and loans to rise, making savings in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive. This is expected to temper the demand for foreign currency and hence moderate the pace of depreciation in the exchange rate and its consequent impact on inflation.
The country’s international reserves remain strong, the central reported, underpinning its capacity to support the foreign exchange market when necessary. Additionally, the increases in the interest rate are epected to generally reduce demand in the economy and, consequently, businesses’ ability to pass on price increases to consumers, by the central bank’s analysis.