The Bank of Jamaica (BOJ) has held its key policy interest rate at seven per cent as it seeks to maintain tight Jamaican dollar liquidity and to continue fostering relative stability in the foreign exchange market.
The decisions were informed by the Monetary Policy Committee’s view that incoming data were generally favourable for inflation continuing to ease and returning to the target range of four to six per cent by the December 2023 quarter.
Jamaica’s inflation rate of 7.8 per cent at February 2023 was below the 8.1 per cent recorded at January 2023.
The key external drivers of headline inflation, such as grains, fuel and shipping prices, continued to decline broadly in line with the Bank’s expectations. In addition, inflation expectations continued to track downward.
Core inflation (which excludes food and fuel prices from the Consumer Price Index) also decelerated to 6.6 per cent as at February from 7.1 per cent at January 2023.
The pace of monetary tightening by the US Federal Reserve Board (Fed) also slowed as expected, the BOJ said.
Moreover, recent developments in the US banking system suggest that this slowing could continue as interest rates in that economy may be near their peak.
The MPC also noted that interest rates in the domestic money and capital markets and the term rates offered by deposit-taking institutions (DTIs) have generally increased in line with the policy rate.
However, the DTI sector has so far made only marginal adjustments to saving deposits and lending rates.
Preliminary survey data indicate that these rates will be adjusted upward by marginal amounts in the near future.
Notwithstanding the slow response of selected saving and lending rates to monetary policy signals, respondents to Bank of Jamaica’s Quarterly Credit Conditions Survey indicated that banks tightened credit terms for the December 2022 quarter.
Credit terms are expected to tighten further for the March and June 2023 quarters. The MPC noted that the banking system remains sound with adequate capital and liquidity.
Notwithstanding the favourable outlook, the MPC’s assessment is that the near-term risks to the inflation outlook remain elevated. Against the background of continued growth in the domestic economy, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation.
Higher inflation could also occur from worsening supply chain conditions and higher commodity prices if further geo-political disruptions exist.
On the downside, weaker-than-expected global growth could negatively affect domestic demand and some projected adjustments to regulated prices may not materialise.
