Bank Of Jamaica lowers policy rate to 1.75%
The decision reflects the Bank’s most recent assessment that inflation could now fall below the lower limit of the 4.0 per cent to 6.0 per cent target in the latter half of 2019
Saturday, 22nd December 2018
The Bank of Jamaica (BOJ) has lowered the policy interest rate the rate offered on overnight placements with the central bank by 25 basis points to 1.75 per cent.
The decision reflects the Bank’s most recent assessment that inflation could now fall below the lower limit of the 4.0 per cent to 6.0 per cent target in the latter half of 2019 and early 2020.
There is also some risk that inflation could fall below 4.0 per cent at December 2018, the BOJ said in a release.
In recent times there has been an increase in Treasury bill yields, but the BOJ, asked earlier this week what that might portend for the next policy rate decision, said “the Bank’s policy decisions are not determined by the trend in Treasury bill yields but on the Bank’s outlook for inflation, relative to its inflation target.”
It also said that “the signal rate influences other rates in the money market, including those on Treasury bills. Treasury bill rates are therefore converging with Bank of Jamaica’s signal rate as institutions seek higher yields in alternative investment instruments.”
In its release, the BOJ said the inflation rate at November 2018, as reported by the Statistical Institute of Jamaica, was 4.1 per cent, lower than the 4.7 per cent recorded at October 2018 and the 4.9 per cent at November 2017.
At the Bank’s last assessment in November 2018, inflation was projected to approach the upper end of the 4.0 per cent to 6.0 per cent target by June 2019 and trend thereafter to the middle of the target range.
The central bank said that over the short term the key sources of upward price pressures were expected to emanate from continued improvements in domestic demand and increases in utility rates consequent on an assumption that international oil prices would remain elevated for the next two quarters.
“One of the main downside risks to the November 2018 forecast that would cause inflation to be lower than projected was that international oil prices could be lower than anticipated,” it said.
Those downside risks have since materialised with crude oil prices for October and November 2018 falling significantly below the Bank’s forecast.
In addition, the likelihood is increasing that oil prices will remain at their current low levels – approximately 30 per cent below the previous forecast – and this intensifies the risk of inflation breaching the lower limit of the Bank’s target over the near term.
Declines in domestic agricultural prices, associated with an expected recovery in crop production in the December 2018 quarter, could intensify this risk over the very short term, the BOJ said.
Meanwhile, all measures of underlying inflation at November 2018 continued to be low, lending support to an assessment that recent improvements in domestic demand have not
stimulated inflationary pressures in Jamaica, said the central bank.
It also pointed out that over the near term, the domestic economy is likely to continue to reflect some slack, meaning that projected gross domestic product growth is less than the Bank’s estimate of its potential.
In the medium-term, growth prospects are heavily contingent on the continued expansion of construction and agriculture, which both carry some downside risk.
There is a downside risk to domestic growth from potentially weaker external demand signaled by the revision downwards in the US Federal Reserve’s growth outlook, notwithstanding its decision this week to increase its policy rate.
There is also a downside risk to domestic growth as the pace of expansion in private sector credit extended by deposit-taking institutions in October 2018 was lower than the BOJ’s forecast and showed signs of weakening.
Credit to the private sector expanded year over year by 16.3 per cent at October 2018, slightly lower than the growth of 16.4 per cent at September 2018 but above the 11.6 per cent at October 2017.
“The BOJ’s decision to lower the policy rate is therefore aimed at stimulating a pick-up in the rate of expansion in private sector credit, which should lead to higher economic activity, which will support inflation being maintained in the target range of 4.0 per cent to 6.0 per cent,” it said.
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