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IMF: Hike in US interest rates might be good for Jamaica

Published:Sunday | October 11, 2015 | 10:00 AMMcPherse Thompson
This June 19, 2015 photo shows the Marriner S. Eccles Federal Reserve Board Building in Washington.

LIMA, Peru:

A hike in interest rates in the United States would result in a concomitant rise in global rates as well as an increase in financing costs, but economically the policy move would be positive for Jamaica and the rest of the Caribbean.

That's according to Nigel Chalk, deputy director of the Western Hemisphere Department of the International Monetary Fund (IMF), who said signs of the US Federal Reserve finally tightening monetary policy should mean, among other things, that unemployment in the country is low, personal incomes are rising and that people have more disposable income they are able to use to support economic activities such as tourism in Jamaica.

However, Chalk, the senior official with the department who oversees Jamaica's economic support programme with the IMF, indicated that although the US proposed policy move is the most telegraphed "ever by anybody", the country has not yet illustrated that the economic environment is yet ripe for it to take such action.

"We have taken a position on the US that they should remain data dependent," Chalk said. Hence, the scenario under it in which it would raise interest rates would be one where, for example, unemployment keeps coming down. "We start to see more signs of inflation in the US economy that's being driven by and driving strong growth," he continued.

Chalk, speaking in an interview with Sunday Business on the margins of the IMF and World Bank annual meetings in Lima, said that with an increase in US interest rates "it's true that global interest rates would rise (and) financing costs as a result would rise, but not that much".

He noted, however, that "the truth is that the first rate hike itself probably wouldn't do that much to, say, Jamaica's financing costs because people look to the entire path of future rate hikes and that's expected by everybody to be very, very gradual. So while you might get a little bit higher rates at the short end of the curve (the tenure of) Jamaica's borrowing is 10, 20 years, so it's a kind of longer term borrowing so it's probably not going to make that much of a difference".

That's on the financial side. "However, on the real economic side, it should be good for Jamaica," Chalk added.

Once the economic preconditions are in place and the Federal Reserve move to increase interest rates, "it should be positive, we think, for the Caribbean and for Jamaica," he said.

On Wednesday, IMF Financial Counsellor Jose Vinals also signalled that the economic conditions are not yet in place for the Federal Reserve to increase interest rates.

Addressing a press conference on the Global Financial Stability Report, Vinals said that amid uncertainty in the global economy, the US should wait until there are further signs of inflation rising steadily, with continued strength in the labour market before raising policy rates.

"The pace of subsequent policy rate increases should be gradual and well communicated," he said.

"Don't do it either too late or too early, and of course, this is subject to interpretation, but our analysis at the Fund is that the process should be data dependent. If we look at the data today we do not see wage and price inflation having the strength that would make it necessary to increase interest rates at this stage in order to guarantee the fulfilment of the inflation objective," he said.

"I think one needs to gather a bit more information regarding data on the US economy, but at a time when you are faced with a zero lower bound still I think that the risks of acting prematurely in terms of tightening are higher than the risks of acting a couple of months afterwards," said the financial counsellor.

Asked if a determination has been made about relaxing any conditionalities under Jamaica's programme with the IMF, Chalk, without going into specifics, said discussions are held with the government each quarter partly to determine whether any of the targets needs to be changed,

"I can say that we are concerned about growth in Jamaica," he said, adding that they have not seen the level of economic expansion they anticipated the country would experience by now.

However, he pointed out that that was because of exogenous factors such as the drought which affected the island last year and continued into this year

"The drought has been a big headwind, but we will look carefully at what can be done to support growth and job creation," said the deputy director.

He said that sometimes people misinterpret the IMF's objective under the programme suggesting that all the Fund cares about is the public debt or meeting fiscal targets.

"These are means to an end," said Chalk, adding that the end for the IMF is that, among other things, Jamaica should be competitive and fast growing. "That's what the programme is designed to do. The targets in between are means to that goal," he added.

The deputy director said he "would like to reiterate how exemplary the performance of this government has been on the programme", while reminiscing that at the start of the programme there were significant misgivings by various parties on whether it would, altogether, be successful.

"I think it's really a testament to the commitment of the government that they have managed to keep this programme overall. And let me emphasise that this isn't an IMF programme. The IMF is there to support with technical assistance and financing, but it's really the government's reform programme and I think they should be commended for the efforts they have made," he said.

mcpherse.thompson@gleanerjm.com