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Wynter: More robust reduction in interest rates needed to spur growth

Published:Monday | May 21, 2018 | 12:00 AMMcPherse Thompson/Assistant Editor - Business
Governor of the Bank of Jamaica Brian Wynter speaks at his quarterly press briefing on monetary policy, at the BOJ Auditorium, Nethersole Place, Kingston, on Monday, May 21, 2018.

Despite the Bank of Jamaica (BOJ) reducing interest rate five times since last July, Governor Brian Wynter says further and more robust downward adjustments may be needed to overcome the sluggishness of the economic recovery.

Last week, the central bank reduced the policy rate the interest rate paid on overnight deposits at the BOJ by 25 basis points to 2.50 per cent.

"This policy change reflects the bank's assessment that inflation over the next three quarters will fall below the lower end of the bank's target of 4-6.0 per cent before increasing towards the centre of the target in the March 2019 quarter," Wynter said.

The central bank now announces its policy rate decisions on a preset schedule. The next decision will be announced on June 27.

Since the switch to the overnight interest rate as the policy rate in July 2017, the BOJ has implemented five cuts, totalling 125 basis points.

"There is reason to be concerned, however, that the adjustment has not so far been enough to stimulate economic activity to levels consistent with the inflation target," said Wynter at his quarterly briefing at the central bank on Monday.

BOJ switched to inflation targeting over the medium term last September, with the target currently at 4-6 per cent.

Wynter noted that the economy has continued to show signs of gradual but sluggish recovery. The central bank reported that for the March 2018 quarter, output is estimated to have expanded in real terms by 1.0 per cent to 2.0 per cent, compared to 0.1 per cent during the corresponding period last year, and 1.1 per cent in the December 2017 quarter.

The estimate for the March 2018 quarter reflects some growth in net exports.

Wynter said the most recent information from the Statistical Institute of Jamaica indicates that headline inflation at April 2018 was 3.2 per cent, lower than the 3.9 per cent the month before and the 5.2 per cent recorded for December 2017.

Inflation was lower than the target mainly because of a sharper-than anticipated decline in agricultural prices since January, reflecting the recovery in output, as well as an unusually sharp decline in electricity costs in April.

The BOJ is projecting acceleration in economic growth over the next two years. Along with projected growth in output, labour market conditions are expected to continue to improve and may, at some point, support wage-related inflation in Jamaica if labour productivity does not improve, Wynter said.

Noting that the risks to the inflation forecast are skewed to the downside, the governor said the major ones are weaker-than-anticipated domestic demand conditions and slower-than-anticipated global economic growth.

"The latter risk is associated with nascent geopolitical tensions and protectionist policies that have surfaced over the last six months or so," the governor said.

He did not specify the risks, but among them are United States President Donald Trump's decision to hike tariffs on steel and aluminium imports, new sanctions that are an emerging threat to the operations of Russian-owned bauxite/alumina operations in Jamaica, and threats to abandon the North American Free Trade Agreement.

Tensions have been caused by, among other things, Trump's decision to exit the international nuclear deal, which gave Iran relief from sanctions in exchange for halting its nuclear programme.

Wynter said there is also an upside risk to inflation from higher-than-projected crude oil prices, "but our current assessment is that crude oil prices are likely to eventually fall as geopolitical uncertainties wane and the impact of excess supplies prevails on the market".

Adverse weather may also cause domestic agricultural prices to rise faster than anticipated, he said.