BoJ defends interest rate increase, ramps up anti-inflation measures

Faced with continued price increases proving more stubborn than initially anticipated, the Central Bank is defending its ratcheting of interest rates with its latest 4 per cent policy rate.

It has also outlined a raft of other monetary policy measures it is employing  to beat back inflation from the current 9.7 per cent to the 4 to 6 per cent range within which the Bank of Jamaica (BoJ) is statutorily mandated to keep price escalations.

At the BoJ's quarterly monetary policy press conference on Monday, Central Bank Governor Richard Byles said the bank's monetary policy committee had settled on the pursuit of stronger measures to contain Jamaican dollar liquidity expansion and to maintain stability in the foreign exchange or FX market.

Some of these actions include issuing longer tenor open market instruments, direct exchange sales to the energy sector and ensuring adherence to foreign exchange investment limits by regulated financial institutions.

"These stronger policy actions should result in a tightening of liquidity, an improvement in the preference for Jamaican assets and consequently, greater stability in the foreign exchange market. In turn this will take some pressure off inflation," Byles said.

The central bank head made it clear that in addition to the concern about the higher than programmed price rises for the sixth consecutive month, the monetary policy authority has its eyes fixed firmly on high inflation's potential to spur significant depreciation of the local currency and thereby feed a cycle of even greater price escalations.

“The Bank also adjusted the FX net open position limits for deposit-taking institutions in December to support its fight against destabilising movements in the exchange rate," he said.

According to Byles, with these policy adjustments, while interest rates in the money markets have increased, banks remained relatively liquid and, for the most part, have not passed on the policy rate increases to their customers who hold deposits.

"This means that to the public, Jamaican dollar assets/deposits have not become more attractive compared to US dollar assets, leading to a preference for foreign assets and pressure on the foreign exchange market,” the BoJ governor said.

The possibility of capital flight is also on the central bank's radar.

“The prospects of earlier and stronger monetary policy tightening by our major trading partners, notably the United States, may result in capital outflows which could cause pressures on the exchange rate if domestic monetary policy is not appropriately aligned,” Byles said.

While the US authorities have not yet increased interest rates, it has signalled its intention to do so and have already significantly cut back on liquidity support for its banking sector.

The BoJ increased the policy rate it pays on overnight deposits by deposit taking institutions by a 200 basis points between September and December last year and again by another 150 basis points effective Monday.

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