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Bus fare, electricity rate increase may test inflation target - BOJ

Published:Wednesday | August 27, 2014 | 12:00 AM
Governor of the Bank of Jamaica Brian Wynter (right) and Deputy Governor Gayon Hosin at a briefing in February 2014. - File

The increase in bus fares, which took effect on Sunday, and the tariff for electricity requested by the Jamaica Public Service Company, could push inflation towards the upper end of the seven to nine per cent band projected by the Bank of Jamaica (BOJ) for fiscal year 2014-15.

However, the impact created by the bus fare increase would be temporary, BOJ Governor Brian Wynter said, noting that despite significant economic shocks over the past two years inflation was still in single-digit territory and has trended down since September 2013.

Fares for commuters using the state-run Jamaica Urban Transit Company (JUTC) service went up by 20 per cent for adults, 50 per cent for students and 100 per cent for persons 60 years and over.

Headline inflation stood at eight per cent at the end of June 2014, down from 8.8 per cent at the same time last year, and down from 8.3 per cent at the end of March 2014, said Wynter, at his quarterly briefing on monetary policy on Monday.

Among the economic shocks, he said, was a 13.3 per cent and 10.3 per cent depreciation in the foreign exchange rate in the last two fiscal years respectively, as well as a 25 per cent increase in bus and taxi fares last year.

"Historically, such a combination of shocks would have been enough to send inflation spiralling into double-digit territory, but that did not happen this time. Instead, the environment for inflation has demonstrated what I would like to characterise as an unprecedented resilience," said the central bank chief.

Accounting for that resilience, Wynter said, was the strong fiscal conditions created by the reform programme undertaken as part of Jamaica's four-year agreement with the International Monetary Fund (IMF), which has restrained the ability of producers and retailers to pass on to consumers the impact of some shocks, particularly the exchange rate depreciation.

In addition, in the productive sector, especially in agriculture, which has a significant impact on inflation, there were considerable improvements in efficiency and output with the advent of supply-side initiatives such as the agro parks.

Fiscal discipline

Maintaining and building on those gains, said Wynter, will require that the fiscal discipline will continue to temper the emergence of excess domestic demand and thereby deepen the economy's resilience.

In addition, the preservation of economic stability, together with the maintenance of recent gains in external price competitiveness, will allow the productive sector to grow faster, led by exports and competitive import substitution, he said.

The central bank is aiming to keep inflation in the six to eight per cent range over the next two years, while its longer term objective is a two to four per cent range, in line with Jamaica's main trading partners.

During the June quarter there was a deceleration in inflation, largely reflecting a slower pace of increase in agricultural commodity prices. However, the governor said the impact of the current drought has already become evident in data for July, which show that prices went up by 1.4 per cent, bringing the annual inflation rate to nine per cent.

The 12-month inflation rate is expected to remain within the seven to nine per cent target for the September 2014 quarter, possibly staying at the upper end of the range during August, Wynter said.

The BOJ is projecting that most of the impact from the drought will be seen in the September quarter, but reversed by year end.

"This view is underpinned by the assessment that most of the crops that were affected by the drought were short-term and as replanting resumes, when the weather normalises, agricultural prices will go back down," he said.

The inflation forecast for fiscal year 2014-15 is also underpinned by assumptions of higher oil prices in light of geopolitical tensions and some pass through of exchange rate depreciation.

On the other hand, the governor said, continued declines in international grain prices, due to favourable weather conditions in producing countries, as well as continued weakness in domestic demand, are expected to have a downward effect on inflation.

The central bank estimates that real economic activity expanded in the range of one to two per cent during the June quarter, and the recovery is projected to continue over the next four quarters, notwithstanding the drought, Wynter said.