Byles: BOJ rate cut meant to spur private sector credit

Credit extended by deposit-taking institutions to private-sector businesses as well as households has accelerated in recent months, growing to 16.8 per cent over the 12 months to June 2019, compared with the 12.3 per cent a year earlier.

However, Bank of Jamaica Governor Richard Byles said that while the faster pace of credit “is a positive signal, we are of the view that this expansion in credit is still not fast enough, particularly in the context where domestic activity remains below the economy’s potential or capacity”.

He added that “this suggests that an even faster pace of credit growth is possible without causing inflation to rise above the inflation target”. It was Byles’ first briefing, which came just 10 days into his appointment as governor of the central bank on August 19.

On Tuesday, the central bank lowered the policy rate – the rate offered on overnight placements with the BOJ – by 25 basis points to 0.50 per cent per annum, effective August 28.

The decision to cut rates further reflected the bank’s assessment that in the absence of additional monetary policy action, inflation is expected to fall below the lower limit of the target of 4.0 to 6.0 per cent at various points over the next eight quarters, said Byles, in presenting his first quarterly monetary policy report at the BOJ’s office in Kingston on Thursday.

In addition, he said, notwithstanding the recent uptick in annual inflation, core or underlying inflation is projected to remain at relatively low levels. Following that, headline inflation is forecast to gradually approach the midpoint of the target, although at a slower pace than anticipated a few months ago.

Byles, who chaired one of Jamaica’s largest financial conglomerates, Sagicor Group, before taking on the central bank leadership, said that if Jamaica were to pursue an inflation target lower than the 4.0 to 6.0 per cent, it would require a reversal of the central bank’s current accommodative monetary policy posture to one that is more conservative and restrictive.

That would result in a slowing of the pace of economic expansion and job creation and could also have an adverse impact on the fiscal accounts, he said.

“Bank of Jamaica’s decision to lower the policy rate is therefore solely intended, as usual, to stimulate a faster pace of expansion in private-sector credit, which will fuel increased economic activity on the part of businesses and households,” the governor said.

Price pressures

He added that increased economic activity will be accompanied by price pressures and hence, the rate cut will support inflation returning to the centre of the target more quickly.

The policy rate cut on Tuesday followed a series of reduction which saw the central bank cumulatively lowering it 300 basis points between June 2017 and June 2019.

“The response of the system to our policy signals has been significant as we have seen reductions in commercial banks’ local-currency lending rates,” Byles said.

“At the same time, we have observed a marked uptick in growth in financing provided by deposit-taking institutions, that is, commercial banks, merchant banks and building societies, to the private sector,” he said.

“This demonstrates that the transmission of policy rates to market rates has been working, albeit not as efficiently as we would have liked.”

The governor added that the main factors that inform the BOJ’s inflation outlook were low, although improving domestic demand, which translates into low underlying or core inflation; slower growth and lower inflation among Jamaica’s main trading partners; declines in crude oil prices, and the impact of an imminent change in the fuel mix used in generating electricity.

The BOJ’s outlook is that headline inflation will average approximately 4.3 per cent over the next eight quarters and, in the absence of further monetary policy accommodation, will in all likelihood fall below the lower limit of the target at various points during that period.

Byles said the outlook is based on the expected impact of continued low domestic demand conditions relative to the economy’s capacity, as well as expectations for slow growth among Jamaica’s main trading partners and declines in international commodity prices.

“In addition, we expect a change in the fuel mix in Jamaica’s electricity generation by the Jamaica Public Service in favour of liquefied natural gas in the December 2019 quarter will translate into relatively lower electricity rates,” he said.

Noting that the domestic economy continues to operate below its potential, the governor said “we believe there is room to accommodate a faster pace of growth in economic activity without compromising the inflation target”.

In that context, the central bank will maintain an accommodative monetary policy stance to support a faster return of inflation to the centre of the target, he said. Accommodative monetary policy typically results in rate cuts that are meant to drive credit expansion by making money less expensive to borrow.

mcpherse.thompson@gleanerjm.com