BOJ evaluating inflation policy switch
Published:Sunday | July 18, 2010 | 12:00 AM
Jamaica's monetary authority is seriously considering a switch to a 'targeted inflation' regime in the hopes of driving inflation down to single digits but also offering markets greater predictability in price movements.
"The bank is now evaluating the path to an inflation-targeting mechanism to manage inflationary expectations," said Brian Wynter, governor of the Bank of Jamaica (BOJ).
"This is where the bank would pre-announce targets for the inflation and then give greater public disclosure on the performance of monetary policy in relation to these targets."
Inflation is a driver of both foreign exchange and interest rates, and while the debate on inflation targeting has been low key, economic commentators have said it is a likely solution to Jamaica's often-high inflation outcomes.
The argument has been advanced that a predictable inflation rate at single digits is more of a lasting solution to bringing down the cost of bank credit to producers than appealing to lenders who have to price loans above inflation to reap real returns.
"One way the central bank can help to build a resilient economy is to move towards an inflation-targeted regime, that is, a regime in which the bank responds to changes in terms of its policy instruments, to changes in the probability of vast swings in future inflation, by adjusting the policy rate," Wynter said Thursday at a forum orgainsed by the Financial Services Commission, where he spoke about building a resilient economy.
Jamaica is predicting inflation this fiscal year at 7.5-9.5 per cent, but last year, the outcome was 13.3 per cent, while in 2008-09, it was 12.4 per cent.
Annual inflation is now running at 14 per cent as at May 2010.
Target is on track
Wynter says this year's fiscal target is on track and may even come in lower than expected at the close of the year in March 2011.
"Based on recent outturns, we are pretty firmly heading towards the bottom of that range, possibly even below," said Wynter.
While the governor noted that the monetary policy of the bank would continue to focus on achieving and maintaining single-digit inflation over the medium term, and that the achievement of an inflation-targeting regime in Jamaica would be a very significant evolution in the management of the country's inflation, he was cautious in his outlook.
"The prospect of successfully moving Jamaica towards an inflation- target regime is far from certain, as there continues to exist significant threat to the achievement of a fiscally responsible environment," he said.
He identified one threat as "demand for special exemption to benefit one sector or another", adding that he was not questioning the validity of the needs, but that yielding to the requests did have fiscal consequences.
The finance ministry approves tax waivers amounting to more than J$1 billion per month, on average, but is in the process of reforming that system.
The Jamaica Debt Exchange was a positive policy initiative, Wynter said, but must be followed by comprehensive fiscal-consolidation efforts and strengthening of the financial sector to drive and sustain economic recovery.