BOJ assessing geopolitical tensions in Middle East
The Bank of Jamaica, BOJ, says it does want to be definitive at this time about its projection for inflation, given the increased level of geopolitical tensions in the Middle East over the last two weeks and the upward movement in crude oil prices.
Senior Deputy Governor John Robinson noted that crude prices “have only just started to go up,” referring to the spike earlier this week following the United States’ assassination of Iran’s top general last week.
“Our tolerance for movements in oil prices is much greater than it used to be in the sense that we are more diversified in terms of energy sources, and oil prices last year have been generally lower than they were the previous year,” said Robinson.
“Our people are just reviewing the situation, so I don’t want to be premature and comment on it at this time,” he said, while indicating that if war breaks out that might change the bank’s calculation.
The central bank’s projection for inflation is 4.0-6.0 per cent for fiscal year 2019-20. Annual inflation for November was trending at 4.6 per cent, as reported by Statin.
Global benchmark for crude oil rose above US$70 a barrel on Monday for the first time in over three months, with jitters rising over the escalating military tensions between Iran and the United States.
Brent contract for oil touched a high of US$70.74 per barrel, the highest since mid-September last year when it briefly spiked over an attack on Saudi crude processing facilities.
The United States killed Iranian General Qassem Soleimani in Iraq last Friday. Iran retaliated by firing a number of missiles at two Iraqi bases housing US troops on Wednesday. However, tensions have somewhat eased since then, as the Trump administration opted not to respond militarily but impose sanctions on Iran instead. Oil prices have since retreated just below the US$60 mark.
The BOJ reported at its last quarterly press conference in November that inflation performance as at October 2019 that the prices faced by consumers in Jamaica rose by 3.3 per cent for the year, compared to 4.7 per cent for the same period in 2018.
The inflation rate for electricity and gas fell by 1.0 per cent over the year, driven by a decline in electricity rates due to a fall in the cost of the fuel used in electricity generation. Transport-related expenses fell by 1.9 per cent as a result of lower oil prices.
The BOJ noted that lower oil prices also indirectly contributed to keeping underlying inflation at a low level.
At the time, the central bank said that over the next eight quarters, inflation is projected to average 4.5 per cent before gradually approaching the midpoint of the 5.0 per cent target in the medium term. The forecast is mainly predicated on expectations for administered price adjustments, exchange rate depreciation, and the lagged effect of previous monetary policy accommodation, tempered by a lower trajectory for crude oil prices.
Oil prices reflected a trend decline since May 2019, which directly affected all energy-related prices in the consumer Price Index.
Notwithstanding the downward trend, oil prices increased in September 2019 in reaction to drone attacks on two major Saudi Arabian crude oil facilities.
The BOJ said the projected path for crude oil prices over the near term, December 2019 to September 2021, had been revised downwards.
The projected decline in crude oil prices is underpinned by subdued energy demand emanating from the slowdown in global growth. Weakening oil demand, combined with strong supply growth in the US, helped build global oil inventories in 2019 and has limited upward pressures on prices.
However, one of the downside risks to which the BOJ pointed in November was the escalation of geopolitical tensions in the Middle East that could lead to a rise in prices and which materialised earlier this week.
The United Arab Emirates said on Wednesday that the Organization of Petroleum Exporting Countries was ready to respond as tensions rise in the Middle East, saying that no country can afford a return to a situation where crude oil costs US$100 per barrel.