Mon | Feb 17, 2020

BOJ’s inflation target missed again

Published:Friday | January 18, 2019 | 12:00 AM
Bank of Jamaica

A decline in agricultural prices, along with a significant reduction in international oil prices, resulted in the consumer price index falling by one per cent for December 2018, bringing the annual point-to-point inflation rate at December 2018 to 2.4 per cent.

That was lower than the Bank of Jamaica, BOJ, target of 4.0 per cent to 6.0 per cent.

As a consequence, the central bank will send a report to the minister of finance and the public service within 60 days or by March 15, 2019, on why the target was missed and any proposed remedial actions, if deemed necessary.

Under the terms of the precautionary standby arrangement with the International Monetary Fund, IMF, the bank is also obliged to consult with IMF staff on the deviation of inflation from the programme target.

"Inflation at December 2018 was lower than Bank of Jamaica's target because of a decline in agricultural prices during the December 2018 quarter, coupled with a significant reduction in international oil prices during the same period and limited pass-through of improved domestic demand conditions to prices," the central bank said in a release.

"The economy needs a level of inflation that is neither too high nor too low. An inflation rate of between 4.0 per cent and 6.0 per cent is judged to be appropriate for Jamaica at this time to ensure a range of desired economic outcomes. A lower inflation rate may be associated with weakness in the economy," the BOJ said.

The BOJ said it anticipates that annual inflation will fall below the target at points during the March 2019 quarter and the latter half of fiscal year 2019-20.

"This near-term outlook reflects the current trends in international commodity prices, potential weakening in global demand and seasonal improvements in domestic agricultural food production," it said.

"The bank remains committed to fostering conditions that generate an acceleration in economic activity that will return inflation to the target of 4.0 per cent to 6.0 per cent in the medium term," the central bank said.

"In this context, on 20 December 2018, the bank lowered the policy interest rate (the rate offered on overnight deposits at Bank of Jamaica) by 25 basis points to 1.75 per cent. The bank's expectation is that financial institutions will pass on the lower rate to customers, resulting in increased economic activity," it added.

Breaches of the inflation target of 4.0 per cent to 6.0 per cent as set by the minister of finance and the public service in September 2017, and reaffirmed in August 2018, require that the BOJ explains to the minister and the Jamaican public why the target was missed and propose remedial actions, as deemed necessary.

Breaches of the bands in the monetary policy consultation clause of the IMF standby arrangement also require Jamaica to consult with the IMF on the causes of the breach and the proposed remedies.

It was the second time this fiscal year that the BOJ's inflation target has been missed.