PSOJ sees credit squeeze from ‘blunt’ BOJ rate hike

Evoking images of the wide-scale collapse of many businesses in Jamaica in the 1990s and the meltdown of the financial sector it triggered as a result of bad bank debts, the Private Sector Organisation of Jamaica, PSOJ, is suggesting that the country could again be headed down that path with the central bank adopting, three decades later, the same monetary policy stance it pursued then.

“Look at what the BOJ (Bank of Jamaica) is doing now relative to what the BOJ did at that time: very similar actions – drastic increases in interest rates that led to significant fallout in the economy and a material economic crisis that took years to recover from,” said Vice-President of the PSOJ, Dr Adrian Stokes, in an interview with the Financial Gleaner on Wednesday.

The assurances given by the central bank this week that banks have adequate and good-quality capital to stave off any repeat of a crisis similar to that of 1990s, and now have acceptable levels of non-performing loans, were not enough to assuage the PSOJ’s concerns. In fact, the BOJ response creates fresh doubt for Stokes about the soundness of the central bank’s thinking.

“No central banker should dismiss the risk of loans going bad in a rising interest rate environment. That certainly is not best practice. It is not the best approach to take when you are looking at the banking system,” said Stokes, appearing to chide the BOJ.

“What is important from a monetary policy perspective, is not what is happening currently, it is what is likely to occur in the future. That is because monetary policy operates with a lag. Whatever the central bank is doing now is not really impacting the economy currently. It is going to take a few months, a few quarters before it starts to permeate and we feel the full impact,” he explained.

Stokes, up until last month, was senior vice-president and head of the insurance and wealth division for Scotia Group Jamaica.

He is predicting wide-scale negative repercussions from the rate increases, which BOJ Governor Richard Byles said this week have no predetermined ceiling and could go significantly above the present 4.0 per cent policy rate, should conditions warrant, with inflation continuing to breach the statutory 4.0 to 6.0 pert cent range which the central bank is mandated to defend.

Byles himself was a corporate hotshot, as head of financial conglomerate Sagicor Group Jamaica and later its chairman, prior to being recruited to run the central bank in 2019. He also once performed the role of interface between the PSOJ/private sector and the government as co-chairman of a monitoring committee for the economy, alongside the former head of the BOJ.

The potential fallout from the upward movement in the BOJ policy rate, Stokes said, could include a drying up of private credit, with businesses that floated bonds in a low interest rate environment being suddenly faced with higher rates, and investors taking a shorter-term outlook, or simply taking their cash off the table in a bid to remain liquid.

The PSOJ executive member, who chairs the group’s economic policy committee, is also rubbishing the central bank’s expressed fear of capital flight and exchange rate pressures, with investors rushing into hard-currency instruments once America’s central bank, the US Federal Reserve, hikes interest rates starting next month.

Stokes said low interest yields on Jamaican dollar-denominated investments, for many years running, have not scared off investors into seeking better returns from USD investments. He suggested, instead, that it is confidence-sapping policies such as those now being pursued by the BOJ that frightens off investors.

“Capital will flee if capital deems a macroeconomic environment as unstable. Jamaica, in fact, has had negative real rates in local dollar terms for a couple of years, yet we did not see any capital flight out of the country,” said Stokes.

“We did not see any undue pressure coming on to the exchange rate. And the reason for that is because coming out of the IMF programme, and the significant fiscal and monetary reforms that were implemented in the economy, a lot of confidence developed, and that confidence meant that investors were very comfortable with keeping their money in Jamaica.”

Fear of capital flight unwarranted

It’s not simply interest rate differential that determines how capital is allocated, he added. “What is more important for the long-term allocation of capital is the stability of the economy. And as long of policy seems to be prudent and properly calibrated, then the fear of capital flight is unwarranted.”

BOJ’s policy rate is equivalent to the interest it pays on overnight deposits held at the central bank. The most recent rate hike was the BOJ’s most dramatic, a 150 basis point jump to four per cent. The increases for the three other adjustments since last September were in increments of 50 and 100 basis points.

The latest adjustment took effect on Monday, February 21, on the heels of which the PSOJ fired another dissenting salvo, knocking the move in a press release and calling for a more cautious approach from the central bank.

Its call for a wait-and-see monetary stance is premised on underlying weakness still in the economy and the country not having yet regained its pre-pandemic positive macroeconomic indicators.

Vocal opposition to BOJ policy rate rises since September last year by the PSOJ and other business groups has so far failed to moderate the central bank’s aggressive monetary policy response to rising inflation.

“The PSOJ is against the rate increase outright. We believe the BOJ had a lot of room to wait and see how things would have evolved. There are other tools it could have utilised before it utilised the blunt tool of raising interest rates,” said Stokes.

“We do understand that inflation, globally, is elevated and that a cautious approach is required. We look, for example, at the Federal Reserve in the US: they have inflation running much further ahead of their target than we do in Jamaica. They also have an economy that is also overheating – growing very quickly. Yet, that central bank has been very slow to raise interest rates,” Stokes pointed out.

In the US, January inflation at 7.5 per cent is tracking 5.5 points ahead of the 2 per cent inflation target; in Jamaica, January inflation at 9.7 per cent is 3.7 points outside the top end of the target range.

huntley.medley@gleanerjm.com