Pre-Christmas pressure on J$ less than expected
Despite the continued depreciation of the Jamaican dollar over the past months, Bank of Jamaica (BOJ) Governor Brian Wynter said the usual seasonal pressure anticipated at this time of the year is less than expected.
"I think all observers anticipate some pick-up in pressure coming in the pre-Christmas season," he said.
"Interestingly, the kind of pressure people expected didn't happen when people thought it would, and that some may be happening now looks like a sort of muted and late response to what we all thought would happen," Wynter said.
The Jamaican dollar traded at $113.59 to the US dollar on Monday, $0.85 above the $112.74 recorded when the central bank intervened in the market in July of this year.
Wynter said then that the BOJ intervened to prevent disorderly conditions because the rapid rate of depreciation a few weeks prior was not justified by any fundamentals in the market.
The Governor attributed the limited pre-Christmas pressure to strong performance in tourism and flows from the business processing outsourcing sector, which he said were "creating conditions ... that improve supply of foreign exchange".
Moreover, demand for foreign exchange "has really dropped as imports have gone down, and we expect that to continue", Wynter said.
Last week, the Statistical Institute of Jamaica reported that Jamaica's expenditure on merchandise imports during the period January to August 2014 was valued at US$3.89 billion compared to US$4.01 billion during the same period of 2013, representing a US$119.7 million or three per cent decrease.
"So it sets up a very interesting market, but one in which I think we have better prospects of managing the path of rates to ensure that we don't exceed the bounds of volatility that would create undue concerns" for serious foreign and domestic investors, the governor said.
Wynter, addressing his quarterly briefing on monetary policy recently, emphasised the fundamental importance of low inflation to the foreign exchange rate.
"One reason arises from the simple fact that as long as domestic inflation remains much above that of Jamaica's main trading partners, the exchange rate will continue to face pressure to depreciate," he said.
Wynter said that without the depreciation, Jamaican firms will struggle to remain competitive against foreign firms selling their goods and services to the domestic market and in export markets.
"And yes, it is also true that adjusting the exchange rate itself creates challenges for all economic stakeholders, including many of the same firms facing the struggle to maintain competitiveness," the Governor said.
"And so, having a competitive exchange rate helps to remove one of the key constraints on export-driven growth and competitive domestic production, but it doesn't come without problems, which, I have indicated, ... can retard investment decisions and activity," he stressed.
"Reconciling these factors represents a conundrum. But it is a conundrum with a sure and sustainable way out," Wynter said.
"The way out of the conundrum is to lower the rate of inflation and thereby remove this source of pressure on the exchange rate. This is what we are doing," he added.
"We stand ready to maintain order if that's required, but we don't see that as an issue today. Flows have been more than adequate to meet the demand over the last few months and that underpin the stability that we have seen," the Governor said.
Wynter said continued declines in international commodity prices, particularly oil, are expected to moderate inflationary impulses that may arise.