Tue | Sep 18, 2018

BOJ to issue policy rate decisions on set schedule

Published:Friday | February 23, 2018 | 12:00 AM

Starting this year, Bank of Jamaica will make regular announcements regarding monetary policy decisions, based on a schedule that was released earlier this month.

The central bank will issue statements eight times per year, in the current and future periods, based on deliberations, even if its decision is to maintain current policy.

The first policy decision was handed down on Tuesday, when the BOJ cut policy rate by 25 basis points to 2.75 per cent. The BOJ's policy or signal rate is linked to interest paid to banking institutions on their overnight deposits at the central bank.

The next decision will be released on March 27.

"This is a public commitment to an announcement schedule that is an important outcome of the bank's plan to improve the transparency of the monetary policy framework," said BOJ Governor Brian Wynter at his quarterly briefing in downtown Kingston on Wednesday.

Tuesday's rate cut was the second for 2018. The first was also a 25 basis point reduction that took effect on January 18.

Improvements in how the central bank formulates monetary policy, referred to as the forecasting and policy assessment system or FPAS, has culminated in the commitment to fixing the dates in the decision-making calendar for the year ahead and promptly disclosing each decision to the public, Wynter said.

The BOJ will also explain the rationale for each decision, even when it decides to leave the policy rate unchanged.

Wynter explained that under FPAS, the BOJ undertakes a comprehensive assessment of current and projected economic conditions, including the outlook for inflation.

The result of each assessment is a monetary policy decision that normally will be to either increase, maintain or reduce the policy rate.

The governor said those decisions are intended to guide the interest rates set by commercial banks and other financial institutions that affect the spending, investment and saving decisions of households, firms and farms, and which, in turn, influence the rate of inflation.

He noted that the impact of monetary policy changes is usually first seen in money market rates before spreading outwards to other interest rates such as those on bank loans and deposits.

However, those influences exert their effect over long and variable periods, the governor said. Hence, for the BOJ to meet the inflation target, it has to act on how it sees inflation evolving in the future and not in reaction to the current inflation rate, he added.

Over the course of the next year, the BOJ expects inflation to continue to track around the lower half of the 4.0 to 6.0 per cent target before rising to around 5.0 per cent, Wynter said.

The central bank chief explained that a decision to reduce the policy rate is consistent with a view that there is a relatively low risk of future inflation rising above the target. In some circumstances, he said, it may imply that underlying conditions in the economy or in the labour market are weak.

A decision to increase the policy rate most likely means that the BOJ is acting to reduce inflation pressures; while keeping the rate unchanged signals a general comfort by the central bank that interest rates are consistent with future inflation remaining within the target, the Governor said.

"There are other tools that may be used from time to time, but changes to the policy rate will be the principal tool for the conduct of monetary policy," Wynter said.