Business, households brace for more expensive credit

In a far-reaching reversal of a 13-year streak of holding or reducing interest rates, the central bank on Thursday delivered on its August rate rise warning, setting the policy interest rate a percentage point higher, tripling the record low 0.5 per cent it has held for two years, to 1.5 per cent, as the overnight interbank rate on deposits by financial institutions at the Bank of Jamaica, BOJ, effective September 30.

And in an ominous notice to the financial markets, the BOJ said more raise hikes are in Jamaica’s immediate future.

This declaration could effectively mean the end of a super low interest rate regime and an abandonment of the policy of central bank-led COVID-19 economic accommodation to ease the plight of businesses pursued by the Government since the pandemic.

Depending on the effective pass-through to the banking system, the rate rise could set off a corresponding increase in bank lending rates that could further squeeze credit to the struggling productive sector, and make household credit more expensive through higher car loans, credit card and mortgage rates.

The BOJ, however, fingered the Government’s mandate and central bank’s statutory requirement in defence of the 4-6 per cent inflation target and the breaching of that band in August, as the inevitable triggers for the rate rise, the first since December 2008 when it jacked up the policy rate from 14.65 to 17 per cent.

“Bank of Jamaica’s Monetary Policy Committee, MPC, sets monetary policy to meet the inflation target of 4.0 per cent-6.0 per cent, as outlined by the minister of finance in April 2021,” the central bank euphemistically captioned its announcement of the rate increase following the MPC’s September 28-29 deliberations.

Although BOJ Governor Richard Byles in August described the inflation spike and the busting of the national target as “transitory”, the central bank is warning of a worsening inflation outlook.

“Consumers will also be faced with higher prices for agricultural commodities as a result of the recent passage of tropical storms Grace and Ida in August 2021, which may also contribute to a worsening of inflation expectations,” the BOJ said.

The cocktail of policy antidote the central bank is prescribing could involve an even steeper interest rate climb.

“Consistent with meeting its inflation target sustainably in the medium term, the MPC agreed to continue increasing the bank’s policy rate (and by extension raising real interest rates, which are currently significantly negative) and maintaining or intensifying the accompanying measures. This position is subject to inflation and other macroeconomic data evolving as projected,” the bank said in an MPC meeting summary that accompanied the September 30 rate increase announcement.

The inflation control levers being yanked by the central bank extend to the foreign exchange market, where central bank intervention is typically to ensure ample supply and prevent runaway depreciations. In a signal that it might be adjusting its market interventions that have led to greater foreign currency supplies and a consistent appreciation in the value of the Jamaican dollar to its United States counterpart for several weeks now, the BOJ said the foreign exchange dimension will be engaged in the effort to reduce Jamaican dollar growth and stamp down inflation.

“Accompanying this rate increase, the committee decided to continue implementing measures to contain Jamaican dollar liquidity expansion. The committee also reiterated that, while the bank does not target any specific level of the exchange rate, Bank of Jamaica will continue to ensure that further movements in the exchange rate do not threaten the inflation target,” the central bank announced.

The foreign exchange market adjustments are expected to complement sharp rises in the rates offered on BOJ instruments, including certificates of deposit, CDs, that have been on the rise since August as the central bank sought to mop up Jamaican dollar liquidity in the financial system, a classic inflation control tool.

The 6.1 per cent point-to-point inflation in August, up from 5.3 per cent in July, was at the top end of the BOJ projection of 5.5-6.5 per cent over the next two years and was a percentage point above the level price rises of just more than five per cent in August 2020. The earlier than anticipated onset of higher prices in the economy, the central bank reasoned, necessitated the tightening of monetary policy that has begun.

The tightening, including interest rates rise, appeared to have been programmed for later in the fiscal year in keeping the initial BOJ projections for a threatening of the inflation target later than has been the case.

“Inflation was projected to breach the upper limit of the bank’s target range over the next twelve months. Conditional on the gradual tightening of monetary conditions, inflation was projected to remain at 5.0 per cent over the medium term,” the central bank said, conceding that it hadn’t seen the early inflation rise onset coming.

The BOJ, in its analysis, noted the risks of inflation remaining elevated are high and intensified. These risks it enumerated as being higher than expected inflation expectations stemming from the shock to international commodity and shipping prices, a higher than projected pass-through of the increases in these international commodity and shipping prices to domestic prices, and the impact of recent storms on the supply of agricultural foods and their prices. It added that although the fall in international grains prices to date has been stronger than expected, this was not likely to offset the impact on domestic inflation of other shocks.

The BOJ policy move comes ahead of any similar action by the monetary authorities in Jamaica’s major trading economy – the United States. There, the Federal Reserve has held off on any rate increase despite inflation running at a near 20-year high of more than two times the 2.4 per cent originally targeted level, with the consumer price index increase reaching 5.3 per cent in August for a fourth straight month. The Fed has signalled possible rate hikes for 2022 and a tapering off of government support of the economy through the halting or slow down of the treasury buying private bonds starting later this year.

The rising inflation and its contributing factors are posing some risk to at least one other major economic fundamental, namely, the forecast for growth in national output. The central bank is suggesting that gross domestic product, GDP, growth is still likely to fall within the range of 7-10 per cent for financial year 2021/22 but that the outturn is now likely to be closer to the lower end of the forecast range.

“Economic activity is now expected to be affected by weaker than anticipated global growth, a temporary disruption to production at one of Jamaica’s main alumina plants, tightened COVID-19 measures and adverse weather. In this context, growth in mining and quarrying; agriculture, forestry and fishing and other sectors are expected to be weaker than previously anticipated," said BOJ. "Notwithstanding, the economy is still expected to continue to grow from the June 2021 quarter onwards and return to pre-COVID-19 levels by the end of 2022. The principal downside risk to GDP growth over the forecast horizon is the continued adverse impact of the novel coronavirus on the Jamaican economy,” the central bank said.

huntley.medley@gleanerjm.com