Mon | Sep 25, 2023

Interest rate decision watch as inflation climbs again

Published:Friday | November 18, 2022 | 5:51 AMHuntley Medley - Associate Business Editor
The Bank of Jamaica at Nethersole Place, Kingston.
The Bank of Jamaica at Nethersole Place, Kingston.

The eyes of market watchers and the investing and business community are keenly fixed on Bank of Jamaica, BOJ, for its latest monetary policy decision today as the central bank pursues the corralling of inflation back to its target range of 4.0 to...

The eyes of market watchers and the investing and business community are keenly fixed on Bank of Jamaica, BOJ, for its latest monetary policy decision today as the central bank pursues the corralling of inflation back to its target range of 4.0 to 6.0 per cent.

Today’s statement from the central bank will signal whether it is pressing ahead with further tightening of money supply and the attendant choking of economic growth prospects, or it will be easing off the policy rate hikes by which it signals the direction of interest rates in the banking system.

If the most recent inflation expectation information is anything to go by, the central bankers may want to further compress inflationary outlook by holding the line on its series of rate increases – its primary inflation-control mechanism – that would see the policy rate climbing above the current 6.5 per cent that was set almost two months ago.

The September 2022 survey of inflation expectations showed that business operators expect inflation to track at 11.7 per cent over the next 12 months, a considerable level above September’s 9.3 per cent point-to-point inflation outturn. Although this outlook is a moderation of the previous survey’s 12.6 per cent, where businesses expected price increases to reach, BOJ policymakers will, no doubt, be conscious of the importance of action consistency and the credibility benefit of continuing to demonstrate strong inflation-control resolve.

As BOJ Governor Richard Byles and the central bank’s monetary policy committee have pointed out, however, there are other indicators which they use to gauge their policy moves. One is the movement of the inflation rate itself.

Inflation has not effectively moderated so far this year from its 9.7 per cent in January. It measured 9.9 per cent at October, which represented a worsening over September’s 9.3 per cent. It is doubtful that the central bank will see this as a sustained fall-off from price rises, which peaked at a 12-month inflation rate of 11.8 per cent in April. The dip since April may not be perceived to be sufficient to warrant an easing of monetary tightening.

Taking a heavy cue from the policy stance of the United States Federal Reserve board since the BOJ launched what has been regarded in some circles as its pre-emptive strike against inflation in Jamaica in September last year, following the August 2021 overshooting of the inflation target by 0.1 per cent, the local central bank could be emboldened by the Fed’s continuing aggressiveness in pulling the rate hike lever as recently as earlier this month. On November 2, the Fed increased its policy rate by 75 basis points (0.75 of a percentage point) to a range at 3.75 to 4.0 per cent in pursuit of its 2.0 per cent inflation target.

The Fed has also continued its strong forward guidance, giving the market notice of additional rate hikes to come, while signalling further reductions in its holdings of securities – another of the inflation-control tools being deployed by central banks. The Federal Open Market Committee will again meet to review inflation and rates on December 13-14 and at the end of January next year.

With imported inflation making up a big chunk of price movements, the BOJ will also be looking towards sufficiency of supplies and significant and sustained reductions in world commodity prices to determine any possible easing of its monetary policy.

The World Bank reports that for October, energy prices fell seven per cent, led by natural gas, which saw a 34 per cent price reduction in Europe and 27 per cent decline in the US. Non-energy prices are measured to have moderated 1.7 per cent during the month, with agricultural prices easing by 0.7 per cent. Food prices on a whole, however, increased by 0.8 per cent led by grains, which were 5.7 per cent more expensive.

Uncertainty surrounding the fate of the United Nations-brokered Black Sea deal for the export of grain from Ukraine does not augur well for the global food prices outlook. The deal was to expire on November 19, but will now be extended by 120 days in an agreement reached on Thursday.

While focused on its inflation targeting mandate, the central bank will also be keeping an eye on the impact of further money compression on the prospects for economic growth, as the success of its policies will also be judged by its ability to engineer what is considered a ‘soft landing’ for the economy. That is an outcome that does not imperil growth by tipping into recession. So far this year, the growth outlook has already been dampened. The BOJ is projecting economic expansion of 2.5 to 3.5 per cent for the September 2022 quarter, following more robust growth of 6.5 per cent and 4.8 per cent recorded in the March and June 2022 quarters, respectively.

The BOJ last increased its policy rate on September 29, when it tacked on 50 basis points (0.5 of a percentage point), the margin by which it has increased rates for seven of the nine increases that have raised the policy rate by 600 basis points over the past 13 months. Its initial increase in September last year was by 100 basis points, and it upped the benchmark rate it pays deposit-taking institutions, DTIs, on overnight reserves by 150 basis points in February this year.

“While the key drivers of inflation and other economic indicators are trending in the right direction, conditions have not sufficiently solidified to ensure that inflation is sustainably on a downward path,” the BOJ said, in announcing its last policy rate increase in September.

It also expressed disappointment with the slow pace of movement of DTI loan and deposit rates in response to the central bank policy rate signals.