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

BOJ slams interest rate critics

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

Bank of Jamaica Governor Richard Byles has slammed critics of the central bank’s decision to hike its key policy interest rate twice in the last six weeks — a measure the governor said was taken to control worsening inflation to prevent it from spiralling out of control.

The central bank has come under heavy criticism from economists, business leaders, and even the Opposition spokesman on finance Julian Robinson for the action. However, Byles, who was speaking in the bank’s Monetary Policy Committee press conference on Friday, was strident in reply.

Opposition spokesman on finance Julian Robinson (File photo)

“The very same voices which are talking out against the 1 per cent and the 0.50 per cent movement in our policy rate, those very same people would be criticising the central bank for not being more proactive,” the former insurance executive turn central bank governor retorted.

He added that raising interest rates was a call he was happy to make after the Monetary Policy Committee deliberated and decided it was time to move on cauterising inflation.

“Let’s move early, we don’t have to be too dramatic, we don’t have to move interest rates by 300 [or] 400 basis points. Let us move it incrementally and signal to everyone that we are here watching and we are prepared to act again if we don’t see expectations come into line,” he added while reasoning that the bank is determined to bring inflation back within the target range of 4 per cent to 6 per cent as mandated by the finance minister earlier this year.

Governor of the Bank of Jamaica Richard Byles (File photo)

Inflation at the end of October was hovering at an 8-year high of 8.5 per cent, reflecting the higher costs of food, transport, and energy since the summer.

More inflation expected

A survey of hundreds of business leaders, including those who set the prices for products and services for consumers, show the expectation is for inflation to be around 7.4 per cent in the next 12 months. Byles, however, said the bank is uncomfortable with such expectation, which lies above the upper bound of the 4.0 per cent to 6.0 per cent inflation it was told to maintain. He said, given Jamaica’s history of high inflation, which has been destabilising to growth, the bank had to act, not just to deal with inflation now, but also to counter expectations that it will remain high.

“Memories are short, but we can just as quickly get back into a cycle of upping prices; wages go, prices go, wages go up, to the point where things get out of control. Better that [the] Bank of Jamaica moves early, try to cut down on expectations, inflation expectations, than for us to be late and find it much harder or impossible to retrieve price stability. So, I’d rather be criticised for moving early than for moving late and losing the game,” Byles said.

He pointed out that central banks across the world have started to tighten monetary policy and, though the Federal Reserve, the US central bank, is yet to hike its own policy rate, the expectation is that it “will start happening in the United States very shortly”.

While pointing out that supply chain constraints, which have been influencing shipping prices and higher commodity prices, have been stoking inflation locally, Byles said he was also concerned about “imported inflation causing second-round price increases.” He pointed to higher prices for rent which jumped by 10 per cent in August, as an example.

“Here is a service that has nothing to do with imported commodity prices [or] shipping prices. It’s a second-round effect, and it may be one of the first, but there are more to come. Education, those prices have gone up. You may hear doctors upping their prices and then when you go to wage negotiations you get increases there also,” he quipped.

“It’s a common sense thing to understand that if inflation is initially imported, there will be knock-on, second-round effects, and that is what we are aiming to temper down by moving interest rates, which makes consumers want to save more rather than spend — which makes borrowing more expensive and which kind of quietens down the economy and take a little bit out of the demand in the economy and make it a little more difficult for prices to move.”

Robert Stennett, head of the Research and Economic Programming Division at the Bank of Jamaica, said 60 per cent of the inflation is explained by four factors — higher costs for grain, energy, agricultural products, and transport costs associated with recent fare hikes for route taxis; the so-called shocks.

Robert Stennett, head of the Research and Economic Programming Division, Bank of Jamaica (Photo: CERT)

“The issue with shocks is that, while they tend to be temporary, they tend to have a long-lasting impact, and if we do not react, it’s going to be like an avalanche. What we are seeing now is the first movements of those snowflakes downhill. But without a significant effort — both policy-related and communication — to stall this avalanche, we are going to be in problem.”