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Bank of Jamaica readies for inflation targeting

Published:Wednesday | April 22, 2015 | 12:00 AMMcPherse Thompson
Brian Wynter, governor of the Bank of Jamaica.

With annual inflation at its lowest in 48 years, the Bank of Jamaica (BOJ) will be conducting annual reviews to assess Jamaica's readiness for an inflation-targeting regime.

According to the latest memorandum of economic and financial policies submitted by the Jamaican Government to the board of the International Monetary Fund (IMF), the first review will assess institutional readiness as at March 2015.

"Over the longer term, the objective is to achieve a gradual reduction of inflation to a rate that is consistent with that of our main trading partners, in the context of a possible move to full-fledged inflation targeting," the Government said.

The United States, the Eurozone, and Japan are all aiming towards inflation approaching two per cent. Some economists have argued that the target should be significantly higher, at around four per cent. But this view was not shared by any of the panellists at a seminar on 'The elusive pursuit of inflation' at last week's Spring Meetings of the IMF/World Bank Group in Washington, DC, who recommended focusing on the already challenging task of reaching two per cent.

The annual inflation rate for the United States, Jamaica's major trading partner, was -0.1 per cent at March 2015, according to data published by the US government last Friday.

Jamaica's annual inflation rate at the same date was 4.0 per cent.

To put in place the operational building blocks for an inflation-targeting regime, the BOJ will, for example, identify specific policy actions to improve the operations of the foreign exchange market to facilitate better information discovery and deal more efficiently with volatility, the Government said in a previous memorandum of economic and financial policies.

Under inflation targeting, a central bank estimates, and makes public, a target inflation rate in an effort to steer actual inflation towards that target through the use of interest rate adjustments and other monetary tools.

From as far back as 2010, BOJ Governor Brian Wynter had disclosed that the central bank would be moving towards inflation targeting, a policy practised in some developed countries whereby the level of inflation is predicted over the medium to long term.

pre-announced targets

"One way the bank can help to build a resilient economy is by moving towards an inflation-targeting regime in which the bank responds to changes in the probability of large swings in future inflation by adjusting its policy rate," Wynter said then.

"This is where the bank would pre-announce targets for the inflation out-turn and give regular publicly disclosed reports on the performance of monetary policy in relation to these targets. These reforms would be aimed at ensuring that inflation expectations continue to trend downwards and the inflation rate itself declines to single-digit levels."

Last week, when the Statistical Institute of Jamaica reported that fiscal and annual inflation had fallen to four per cent, BOJ noted that the decline in consumer prices was sharper than expected and due in part to the fall in oil prices on the international market, as well as the moderation in price increases resulting from fiscal consolidation and economic reforms.

According to Statin data, the annual inflation rate peaked at 80.2 per cent in 1991.

The four per cent recorded for fiscal 2014-15 was well below the central bank's 7-9 per cent target range.

While trumpeting the inflation rate as a 48-year low, the central bank announced a cut in its benchmark interest rate on its 30-day certificate of deposit from 5.75 per cent to 5.5 per cent. BOJ last adjusted its policy rate in February 2013.