Prices down - But missed inflation target triggers talks with IMF board

The Bank of Jamaica (BOJ) has partly attributed a sharp decline in domestic food prices to the 2.8 per cent out-turn in inflation for June, a deviation from the 3.5 per cent to 6.5 per cent target under Jamaica's standby agreement with the International Monetary Fund (IMF).

The deviation means a breach of the inflation band limit and will automatically trigger consultation with the IMF's executive board about the reasons for the digression and the proposed policy response. The fall in agricultural prices, which was not foreseeable, accounted for the biggest part of the inflation out-turn, Senior Deputy Governor of the BOJ John Robinson told The Gleaner.

"We had much better weather in the earlier part of this year than we did last year, which resulted in domestic food prices falling fairly sharply," he said.

However, Robinson said, "The out-turn for oil prices was also not as high as may have been expected, and the foreign exchange rate over the last year up to the earlier part of this year had appreciated year-over-year, which was not the expectation".

He noted that inflation for June 2018, a review month, came out at 2.8 per cent year-over-year, below the 3.5 per cent floor under the IMF agreement.

The next IMF mission is expected to visit Jamaica in September for the June 2018 review, and what that will mean is that "we will be required to prepare an explanatory note as to what accounted for that deviation and have a discussion on the policy framework, the set of policies that will lead inflation back to the target zone", said the senior deputy governor.

RESERVE TARGETS ON TRACK

The Economic Programme Oversight Committee (EPOC) reported that fiscal and international reserves targets are on track but noted that inflation was 3.1 per cent at May 2018, dropped to 2.8 per cent in June 2018, and remained below the IMF programme target.

"EPOC reiterates that a low inflation out-turn can be received as positive, but it does have implications for programme targets, specifically fiscal targets, including tax revenues and those linked to nominal GDP (gross domestic product) such as the debt-to-GDP targets and the nine per cent wage-to-GDP fiscal rule for 2018-19," the committee said in a release.

Under the standby arrange-ment, the inflation target, a quantitative performance criterion, was narrowed to plus or minus 1.5 per cent of the centre point of five per cent for the June and December 2018 IMF tests, coinciding with the BOJ's medium-term target of four to six per cent.

Breaching the inflation band limits at the end of each June and December test dates triggers a consultation with the IMF's executive board on the reasons for the deviation and the proposed policy response before further disbursements can be requested.

Specifically, the consultation will explain the stance of monetary policy and whether the Fund-supported programme remains on track; the reasons for deviations from the specified band, taking into account compensating factors; and on proposed remedial actions, as deemed necessary.

mcpherse.thompson@gleanerjm.com