BOJ Raises Policy Rate For Second Consecutive Month

• Bank of Jamaica (BOJ) increased its the policy interest rate, the rate offered to deposit-taking institutions on overnight placements with BOJ, by 50 basis points to 2.00% per annum, effective 17 November 2021. 
• The decision by the Monetary Policy Committee (MPC) was unanimous and was based on its assessment that this action was necessary to limit the second-round effects of recent shocks, such as supply chain disruptions and adverse weather events. The rate increase is meant to guide inflation back within the target range over the next two years, following the breach of the upper limit of the 4.0% to 6.0% target range for 3 consecutive months. Consumer prices increased by 8.5% in the 12 months to October 2021, the highest since September 2014. 
• The reduction in the level of monetary accommodation will cause market-based interest rates to rise further, which will make the returns on Jamaican dollar assets more attractive relative to foreign currency assets. It will also make saving in Jamaican dollars more attractive and borrowing in Jamaican dollars more expensive. These effects are intended to temper the demand for foreign currency and hence moderate the pace of depreciation in the exchange rate. It is also intended to generally, reduce demand in the economy and with it the ability of businesses to pass on price increases to consumers. 
• Inflation is projected to average 5.5% to 6.5% over the next two years. Inflation will continue to breach the upper limit of the Bank’s target range over the next 10 to 12 months at higher rates than were envisaged in the previous forecast and is projected to peak in the range 8.0% to 9.0% over this period. The inflation forecast assumes, inter-alia, the continued transmission of higher international commodity and shipping prices to domestic processed food, food-related services and energy price inflation as well as a recovery in domestic demand.
• While the higher policy rate will help to stem inflationary pressures, it could undermine the nascent economic recovery through a reduction in investments and private consumption. 
• There could be further monetary tightening in the short term as consistent with meeting its inflation target sustainably in the medium term, the MPC agreed to consider further increases in the Bank’s policy rate (and by extension raising real interest rates, which are currently significantly negative) and to maintain or intensify the accompanying measures at subsequent policy meetings. This position is subject to changes in inflation expectations, other macroeconomic data and, consequently, the inflation outlook evolving as projected.

(Sources: BOJ & NCBCM Research)