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The Bank of Jamaica in downtown Kingston, Jamaica (Photo: Jamaica Observer)

Bank of Jamaica’s rate hike

The Bank of Jamaica in downtown Kingston, Jamaica (Photo: Jamaica Observer)

The Bank of Jamaica (BOJ) last Thursday hiked its key policy rate by one percentage point — tripling the rate from 0.5 per cent to 1.5 per cent — drawing the ire of at least one economist who slammed the move as being misguided.

The rate hike takes effect today taking the benchmark policy rate to the highest it has been since February 2019. This is the first increase in interest rates from the BOJ in 13 years. It comes following 32 rate cuts since June 2009 when it was 17 per cent.

The rate has been at 0.5 per cent since August 2019 — a period spanning just over two years.

Deputy Governor of the Bank of Jamaica Wayne Robinson (left) with Governor Richard Byles (second left) and deputy governors John Robinson and Natalie Haynes. (File photo)

The central bank, in notes accompanying the rate hike decision, pointed to increasing inflation, saying its decision is “aimed at ensuring that the annual increase in the prices of consumer goods and services (that is inflation) remains within the bank’s inflation target of 4.0 per cent to 6.0 per cent”.

Inflation in August reached 6.1 per cent, which is above the BOJ’s target.

The bank had forecast the increase in consumer prices, signalling in August that inflation could breach the upper limit of the target in the just-concluded September quarter. It then indicated that it would increase interest rates at its September meeting to control the price increases.

Additionally, in the notes accompanying its decision, the central bank pointed out that “following the breach in August 2021, the risks of continued breaches of the inflation target have intensified”. Factors contributing to that risk include “the recent significant increases in international commodity prices and shipping costs, [which] have had a higher than expected pass-through to local prices and have contributed to further increases in inflation expectations”, the BOJ said.

The Bank of Jamaica building in downtown Kingston. (File photo)

The central bank also warned that “consumers will also be faced with higher prices for agricultural commodities as a result of the passage of tropical storms Grace and Ida in August 2021”, which it said “may also contribute to a worsening of inflation expectations”.

The projection is that inflation “over the next two years would average 5½ per cent to 6½ per cent”. Just last week, Keith Duncan, the chairman of Jamaica’s Economic Programme Oversight Committee (EPOC) said a survey showed CEOs believe inflation could reach as high as 7.4 per cent

Economic Programme Oversight Committee co-chair Keith Duncan speaking at a recent press briefing on the country’s performance under the Economic Reform Programme. (File photo)

But Dr Adrian Stokes, financial economist and senior vice-president and head of insurance and wealth management at Scotia Group Jamaica, who had slammed the signal that BOJ’s policy rate could be hiked in September, maintained that the move is misguided given the current economic conditions facing Jamaica.

“On the face of it, the move by the BOJ to increase interest rates runs counter to the broad macroeconomic conditions in the country,” he told the Jamaica Observer. “While the BOJ has a single mandate to keep inflation within a 4 per cent to 6 per cent band , the interpretation of this mandate has to take into consideration the unprecedented global economic conditions and Jamaica’s fragile economy.

Head of insurance and wealth management at Scotia Group Jamaica Dr Adrian Stokes (File photo)

“Inflation globally has been rising due to supply constraints occasioned by COVID-19,” Stokes said, “These supply bottlenecks are expected to ease over time, starting in Q1 2022. Inflation therefore is expected to be moderate next year. The movement by the BOJ to increase interest rates will have a material and adverse impact on an economy that is still materially below its 2019 peak,” he continued.

“The BOJ, in its previous press release, indicated that the inflationary dynamics are transitory. Transitory implies temporary, meaning the BOJ should have been willing to communicate to the market that inflation will run ahead of target temporarily before falling within its band starting next year. This option would have given the economy room to recover. This latest move by the BOJ is likely to trap the economy within a low-growth band for years to come,” he opined to the Caribbean Business Report.

However, Ryan Strachan, vice-president for investor relations at GK Capital — the wealth management arm of the GraceKennedy Group — sees things differently.

“They are trying to stymie or reduce inflation to keep the prices of goods and services manageable,” he reflected before adding “a consideration I have, however, is whether households can manage increased household debt at this time. Can people who are on the brink of financial peril accommodate more expensive debt?” he asked rhetorically, indicating the likely impact such an increase in interest rates will have on ordinary people with things like credit cards and mortgages.

Strachan, however, added that “runaway inflation will be more detrimental”.

For its part, the BOJ signalled that today’s rate hike may not be the last in the near future: “Consistent with meeting its inflation target sustainably in the medium term, the bank also signals its intent, subject to inflation and other macroeconomic data evolving as projected, to continue to reduce the level of monetary accommodation at subsequent policy meetings by increasing the Bank’s policy rate.”