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BOJ: Depreciation of Jamaican dollar a risk to higher inflation

Published:Thursday | November 21, 2019 | 12:00 AMMcPherse Thompson


The Bank of Jamaica, BOJ, says one of the factors that could cause inflation to breach its targeted range of 4 to 6 per cent for inflation over the next two years is depreciation of the currency.

But that does not appear to be a danger for now, notwithstanding the volatile swings in the foreign exchange rate over the course of this year.

“We note, however, that the impact of the exchange rate on inflation is lower than in the past,” said BOJ Governor Richard Byles at his quarterly press briefing on monetary policy on Thursday.

The JMD hit a new low of $142.23 against the USD on November 12, but has since regained ground to $138.82 as at Wednesday.

Byles also enumerated other risks to inflation as: stronger than anticipated domestic demand, driven by the improved credit conditions in the economy, which would lead to higher inflation; while higher than anticipated production in the agriculture sector, leading to lower rates of increases in food prices, would lead to lower inflation.

The central bank expects consumer prices to rise at an annual rate of about 4.5 per cent over the next eight quarters, the Governor said.

That outlook is based on the bank’s expectations for the pass-through effect on prices of previous reductions in interest rates and cash reserves.

“The impact of this is expected to be partially offset by low global growth and low inflation among Jamaica’s main trading partners, declines in international commodity prices as well as a continued tight fiscal policy,” he said.

Byles also seized the opportunity to comment on the recent depreciation in the Jamaica dollar, which he said stimulated much public discussion and highlights its importance to the average Jamaican.

He said that between October 1 and November 12, despite normal daily inflows, the exchange rate depreciated by 5.2 per cent or $7.07, a movement which reversed the appreciation of 1.8 per cent that occurred in September and erased the sense of normal two-way movement that had been evident for an extended period prior to that time.

“This perception was amplified by the weighted average selling exchange rate breaching the psychological threshold of $140 at the end of October this year,” the Governor said.

He said that one of the factors influencing the spike in demand for foreign currency was the heightened desire relating to portfolio transactions, combined with retailers’ seasonal re-stocking ahead of the Christmas period.

In response to what Byles said was the unusual heightened demand, the central bank acted to boost supply by selling US$140 million to the market between October 18 and November 14 via five flash sale operations under the Bank of Jamaica Foreign Exchange and Intervention Trading Tool, B-FXITT.

In the last intervention on November 14, the bank amended its rules to require that all the funds sold to authorised dealers and large cambios be resold to end-users – non-financial commercial entities that are funding obligations for contracted goods and services.

“The bank is of the view that most of the extraordinary demand for foreign currency has been satisfied,” Byles said. “As such, we have observed that the exchange rate has adopted an appreciating trend since November 13, 2019.”

He said the Jamaican Government was committed to maintaining a flexible exchange rate system.

“Bank of Jamaica will therefore continue to ensure orderly conditions in the foreign exchange market and will intervene if there is excessive volatility or temporary gaps in supply emerge,” the governor noted.

“It is also important that authorised dealers and cambios work together to facilitate a transparent and smooth functioning foreign exchange market.”

The new foreign exchange trading platform that the central bank is introducing is now scheduled for testing and implementation early next year.

“What this platform will do is allow all the traders to see all of the bids on offer, all of the buyers to see the bids, all of the sellers to see the bids on offer,” said Byles.

“So if you are a perpetual buyer or perpetual seller or you are a dealer you can go on this system and every day you will see in real time what the bids on offer are. So it creates more transparency in the market,” he said. “The main point in that the foreign exchange market needs to be more transparent and this platform will help a lot in doing so.”