BOJ: Inflation expected to rise again

The Bank of Jamaica is projecting that inflation is likely to rise again, and data related to the recent rains could further dampen its outlook.

Inflation is currently back within the target range, but “Jamaica is not yet out of the woods where price increases are concerned,” BOJ Governor Richard Byles said on Wednesday.

He also signalled that the central bank remains in wait-and-see mode regarding changing direction on interest rate policy, which has been used as tool to contain inflation. For one year running, the BOJ Monetary Policy Committee, MPC, has kept the policy rate at 7.0 per cent, with its most recent decision being handed down on Tuesday.

“The success to date in controlling inflation could give rise to the expectation of a softening in the monetary policy stance,” said Byles at his quarterly monetary policy briefing, a day after the MPC decision. “However, following a careful survey of the economic environment, the MPC noted that, beyond the impact of increases in transportation fares, the risks to the inflation outlook remained skewed to the upside, meaning that there could be higher inflation,” he said.

Earlier this month, BOJ removed certain limits on the net foreign currency positions of authorised dealers, saying it would promote ‘relative stability’ in the exchange rate. On Wednesday, the central bank also increased the spread between the policy rate and its Standing Liquidity Facility from 200 basis points to 300 basis points, saying it was intended “to allow more flexibility in the bank’s open market operations and to allow money market interest rates more latitude to move, based on the circumstances in the market”.

Headline inflation has cooled to 5.1 per cent, for which Byles has taken partial credit.

“BOJ has a lot to be proud of in its role to bring inflation where it is,” the central bank chief said, a day after the release of the MPC decision.

“We can’t take all the credit. International commodity prices have played a role. But even with that, imagine if the dollar had gone to $165 [against the USD]; [and] if the economy was awash with liquidity. Again, we would find prices rising,” he said.

At its current levels, inflation is back within the central bank’s target range of 4-6 per cent. The current rate reflects a near seven-point swing over time from its pandemic-era high of 11.8 per cent.

“The BOJ, through its monetary tools, have made inflation come back through the corridor,” said Byles.

“We have had a great experience in the last two years. From a brand new independent bank, the pandemic, to hyperinflation, we have done pretty well, but we remain vigilant about the future.”

The ending of the recent drought was at first projected to have alleviated pressure on agricultural prices, as built into the BOJ’s current forecast up to February. But new information is emerging regarding disruptions caused by rain and flooding, and that projection is expected to change as a result.

“The BOJ, based on anecdotal information, notes damage in St Elizabeth, Portland, and other areas,” said BOJ Deputy Governor Robert Stennett.

“The bank is also expecting higher-than-projected wage adjustments, given the tight labour market,” he said at Wednesday’s briefing.

Stennett said that while the forecast coming off the end of the drought had been one of improvement, “all of that is now off the table”, due to the rains besetting the island and the expected impact on the food chain.

“Agriculture is important for the CPI, representing 9.5 per cent of the usual basket. This will receive our scrutiny,” the deputy governor remarked.

The 5.1 per cent headline inflation rate in October marked a deceleration from 5.9 per cent in September, and the third month this year in which annual inflation had returned to the target band, the other time being April when the outturn was 5.8 per cent.

Core inflation, which excludes food and fuel prices and is estimated by the central bank, was measured at 5.7 per cent in October, generally in line with the average for the past two months and lower than the 8.4 per cent high recorded at April 2022.

Key drivers of headline inflation, such as grains prices, shipping costs and inflation expectations, continued to decline, and the exchange rate remained generally stable, due to strong tourism and remittance inflows.

International oil prices also trended below BOJ’s forecast.

Initially, the central bank was concerned about the pressure that higher public transport, or PPV, fares would have on inflation, but the newly announced reduction in JUTC bus fares, which will take effect in January, is expected to moderate the impact.

Upside risks to the inflation forecast include higher-than-projected future wage adjustments in the context of the tight domestic labour market, second-round effects from the PPV fare increases, and sharp increases in domestic agricultural price inflation over the near term.

avia.collinder@gleanerjm.com