BOJ holds rate as economic stimulus

The central bank is closing out the year sticking to its monetary policy stance of low interest rates, in line with its two-year projection that inflation will remain reined in at the targeted four to six per cent over the long term. This assessment is despite inflationary pressure from rising agricultural food prices in the aftermath of recent heavy rains that wreaked havoc on farm production.

As such, the bank announced at the weekend its decision to hold the policy interest rate offered to deposit-taking institutions on overnight cash placements, at half a per cent per annum. Keeping the policy rate at this level is among the tools being deployed in an attempt to shake off the COVID-19 effects on the economy and jump-start greater business activity and general recovery.

“BOJ also proactively implemented a number of initiatives aimed at preserving financial sector stability and ensuring the continued smooth functioning of the foreign exchange market,” the bank said in a statement, referencing its heightened macroprudential policing and surgical interventions in the FX market.

The central bank’s classification of the country’s economic outlook as “uncertain in the context of the ongoing COVID-19 pandemic,” would have come as no surprise, as its expression of cautious optimism is consistent with its other recent pronouncements.

“We continue to assess and monitor new developments as they emerge,” the Richard Byles-led institution noted.

The next policy announcement is set for mid-February 2021.

Meanwhile, the out-turn prognosis for the fiscal year also remains at a contraction of between 10 and 12 per cent, in line with last month’s downward revision from the seven to 10 per cent predicted by the banking regulator in the summer. The expectation is still that green shoots will begin to appear on the back of a recovery in tourism, sufficient to register a three to six per cent uptick in the next fiscal year 2021 to 2022.

The BOJ says the projected decline in real GDP this year will show up more so in the sectors hotels & restaurants, transport, storage and communication, other services, manufacturing and construction sectors – all areas significantly curtailed, though to differing degrees, during the pandemic. Declines in travel, production, distribution and entertainment activities are leading the contraction.

“The bank’s current assessment suggests that the risks to the GDP forecast are skewed to the downside, which implies that the recovery in GDP over the next two years could be slower than expected,” the regulator sounded a sober caution, even while heralding what it said was the possible upside of a faster recovery, which would depend on a successful roll-out of COVID-19 vaccination and containment of the epidemic.

The central bank continues to expect inflation to track at an average of 5.3 per cent over the next two years, within the forecast band, despite the pressures from higher agricultural food prices, costlier international commodity prices, and expectations for increases in some regulated utility prices.

“Core inflation was expected to remain relatively low, given the weak demand conditions in Jamaica. The risks to the inflation forecast are balanced,” according to the BOJ.

The banking supervisor will be keeping its eyes on factors that could send inflation above target. These include higher food prices over the next three months and more expensive oil and grains on the world market.

business@gleanerjm.com