Loan rates set to soar after 8th straight BOJ hike
Published:Friday | August 19, 2022 | 12:11 AMHuntley Medley/Associate Business Editor
The Bank of Jamaica (BOJ) announced Thursday its eighth straight increase in the policy rate it pays on deposits parked by deposit-taking institutions (DTIs) at the central bank, effectively sending loan rates higher for borrowers at financial institutions.
The increase by 50 basis points to 6.0 per cent, effective August 19, is the fifth rate increase this year.
The latest rate rise caps some 10 months of the BOJ increasing the policy rate by a cumulative 550 basis points from 0.5 per cent, where it had remained for more than two years from August 2019 to September 2021.
The previous seven policy rate increases since September 2021 to June this year came in for sharp rebuke from private-sector umbrellas groups, led by the Private Sector Organisation of Jamaica (PSOJ), which pointed to the deleterious effects of rising interest rates on businesses. The PSOJ has argued that businesses are still suffering from negative effects of the coronavirus pandemic.
The BOJ has tacked on 350 basis points this year to the 2.5 per cent policy rate at the start of 2022 and the close of 2021.
The latest rate rise comes despite the central bank noting that inflation peaked earlier and lower than expected in April this year, when it was 11.8 per cent, to 10.9 per cent in May and June, followed by 10.2 per cent at July. It concluded that declining international commodity prices, relative stability in the exchange rate, and higher interest rates accounted for this trend.
The central bank has continued to push back against criticism of its actions, pointing to its mandate to rein in inflation to the 4.0 to 6.0 per cent target range, which has been breached since September last year when point-to-point inflation nudged above the ceiling to 6.1 per cent.
Following this breach, the BOJ was quick to pull the monetary-policy lever, having signalled in August 2021 its intention to raise rates the following month. This after headline inflation reached 5.3 per cent in July 2021, marginally under the 5.7 per cent a year earlier at the height of pandemic restrictions.
The rate rises have accompanied other market intervention measures that the central bank has pursued to mop up liquidity, it has said in defence of the inflation target and stability in the foreign exchange market.
Reporting on the August 16 and 17, 2022, meetings of the BOJ’s Monetary Policy Committee (MPC), the central bank, in a document posted to its website at the close of business Thursday, noted that in addition to the rate increase, the MPC had also agreed to continue pursuing other measures to contain Jamaican-dollar liquidity expansion and to maintain relative stability in the foreign-exchange market.
“The committee noted that the bank’s continued strong international reserves reinforce its ability to continue supporting the foreign-exchange market as needed. The MPC will continue to closely monitor the global and domestic economic environment and is prepared to pause its monetary policy tightening if the incoming data continue to reflect a downwards track for inflation,” the BOJ report said.
The BOJ added that the latest measures are expected to cause interest rates on deposits and loans to rise further, making savings in Jamaican dollars more attractive, relative to foreign-currency assets, and borrowing in Jamaican dollars more expensive.
“They are also expected to reduce the demand for foreign currency, leading to a relatively more stable exchange rate. The measures are also intended to constrain aggregate demand in the economy and, consequently, limit the ability of businesses to pass on price increases to consumers,” the MPC report said.