Fri | Jul 10, 2020

Wynter: Loose monetary policy not loose enough

Published:Thursday | August 23, 2018 | 12:00 AM
Governor of the Bank of Jamaica Brian Wynter.
The Bank of Jamaica on the waterfront in Kingston.

Central bank governor Brian Wynter says monetary policy might not be sufficiently accommodative, and that further action may be necessary to drive private-sector expansion at a pace that will generate growth and jobs.

Accommodative monetary policy is where a central bank such as the Bank of Jamaica (BOJ) attempts to expand the overall money supply to boost the economy when growth, as measured by gross domestic product, is slowing.

Wynter's views are contained in a report to Finance Minister Dr Nigel Clarke explaining why the country missed the June 2018 inflation target of between 3.5 per cent and 6.5 per cent set under Jamaica's standby agreement with the International Monetary Fund (IMF).

The BOJ said the inflation outturn for April, May and June 2018 of 3.2 per cent, 3.1 per cent and 2.8 per cent, respectively, largely reflected the impact of a stronger than anticipated reduction in agricultural prices in the March 2018 quarter, a reduction of the pass-through of oil prices to inflation, and weaker than anticipated domestic demand.

The central bank is forecasting that inflation up to the December quarter will remain close to 3.5 per cent, then rise to the midpoint of the 5 per cent target by June 2019 and remain at that level over the medium term.

That forecast is predicated on a rise in agricultural prices to 'normal level', oil prices remaining elevated and that GDP will increase, the latter driven in part by lower interest rates and more accommodative monetary conditions the BOJ induced over the past year.

The BOJ noted that under the standby agreement, inflation target for the June and December IMF review dates were set under a monetary policy consultation clause.

The 2.8 per cent outturn for inflation for June 2018 meant that the consultation clause has been triggered and requires Jamaica to consult with the IMF's executive board on the reasons for the deviation and the proposed policy response before further request for funding can be made under the standby agreement.

The consultations are expected to explain the stance of monetary policy and whether the programme remains on track, the reasons for the deviations from the inflation band and proposed remedial actions.

In its report to the finance minister, the BOJ said that leading up to the review period, the authorities implemented a number of structural reforms which facilitated improvements in the monetary transmission mechanism the process by which general economic conditions are affected as a result of monetary policy decisions.

The BOJ's assessment was that the transmission mechanism in Jamaica, particularly the credit channel, had not been performing optimally.

That was due to what it described as a variety of deep-seated structural factors, including fiscal dominance, high and rising dollarisation, limited competition in the banking sector, uneven excess liquidity among banks, and underdeveloped interbank foreign exchange and money markets.

According to the central bank, the gaps in its governance and legislative framework may also have affected its credibility and muted its policy signals.

As a consequence, reforms aimed at strengthening macro-financial stability dealt with issues of fiscal consolidation, debt sustainability, resilience of the financial sector, financial inclusion and reducing the level of dollarisation.

Most of the initiatives aimed at improving another pillar of the reforms policy signalling have been completed or are in train, the BOJ said.

Those include the BOJ's establishment of an interest-rate corridor for private money market interest rates, introduction of auctions to interact with the foreign exchange market, a lowering of the foreign exchange surrender requirement and phasing out the foreign exchange sale arrangements under the public enterprise facility.

Legislative amendments aimed at, among other things, enhancing the BOJ's financial and operational independence are expected to be tabled in October this year.

"Bank of Jamaica has undertaken a number of policy adjustments that will help to guide inflation, over time, back into the target band," said the report.

The BOJ's analysis is that the factors responsible for shifting inflation below the target, though somewhat ameliorated, still persist.

"Notwithstanding, it is the bank's view that the economic programme remains on track. The problem of uneven excess liquidity within the financial system remains a constraint to the effectiveness of the transmission mechanism," Wynter said.

"There is also the possibility that additional negative inflationary shocks may adversely affect inflation in the future. Low core inflation, symptomatic of weak domestic demand, will need to accelerate in the context of the pickup in economic activity to approximately 3.5 per cent to be consistent with the midpoint of the target bands."

The central bank chief noted that notwithstanding the strong pace of job creation "the continued slow pace" of economic growth may require stronger monetary policy action to overcome them in the near term.

The Jamaican economy was estimated by the Planning Institute of Jamaica to have grown by 1.8 per cent year on year in the June quarter. However, the final arbiter on GDP performance is Statin, whose numbers lag the PIOJ's.