Mon | Jan 21, 2019

Editorial | A move towards transparency

Published:Monday | August 27, 2018 | 12:00 AM

Nigel Clarke, the finance minister, has made an initial but, this newspaper believes, significant step towards a more rational discourse on monetary policy, including how the actions of the central bank affect the foreign exchange market.

He published the Bank of Jamaica's (BOJ) communication to him, which normally would be private, explaining why inflation in Jamaica, for the first half of the year, was significantly below the official target, and how this informs its policy stance.

Such transparency will become the norm in the future, when the BOJ's autonomy is entrenched in law, with a clear mandate to independently pursue price stability, but with an obligation to periodically account for its action towards that goal.

But as this newspaper had suggested to Minister Clarke and the central bank, which they appear to have embraced, the law need not be in place for the new regime of transparency to begin. It, no doubt, would have helped the authorities who have been under pressure over the sharp depreciation in the rate of the Jamaican currency against the greenback and the need to credibly explain the decline, other than accusations of their incompetence.


Deliberate slide


The Jamaican dollar now hovers at close to J$138 to US$1, a depreciation of around seven per cent over the past three months. This comes after a period of relative stability, fuelling speculation in some quarters that the BOJ has deliberately facilitated the slide in an effort to drive inflation closer to the four to six per cent target the Government set for this year under its US$1.6 -billion standby arrangement with the International Monetary Fund (IMF).

Indeed, in July, Jamaica's 12-month inflation was 3.2 per cent and below one per cent for the first seven months of the year. This, the central bank argues, was the result of better fortunes in agriculture, leading to a lower-than-forecast rise in the price of domestic food crops; lower imported inflation, in part because of an earlier real appreciation of the Jamaican dollar; and weak demand in the economy because of sluggish growth, which in 2017 was less than one per cent.


Optimistic outlook


With officials now reporting growth of 1.8 per cent for the first quarter of the fiscal year, they are now optimistic of being closer to the target of a 2.5 per cent growth for the 12 months up to next April.

Part of the central bank's response to the sluggish economy was to ease monetary policy, it explained to the minister, including reducing its signal rate six times up to June 2017. "The overnight policy rate was reduced four times by 25 per cent basis points on each occasion, to 2.50 per cent at May 2018," it said. The rate was further reduced to two per cent in June.

It added: "This repeated easing of monetary policy was the outcome of bank's forecast over the year, which consistently pointed to inflation falling in the lower part of the bank's 4.0 per cent to 6.0 per cent inflation target." In other words, inflation, to a point, is good for economic expansion.

While this newspaper is not totally satisfied with the robustness of the BOJ's document, including its failure to provide the weight it placed on alternative policy options, we believe it marks an important beginning, beyond the central bank's periodic offering of raw data and the extrapolations to be made therefrom. Independent analysts have a peek into the mindset of the policymakers and, thereby, a better basis for critiquing the wisdom and efficacy of their actions on elements of the economy, including the foreign exchange transactions.

We believe that similar documents, with a broader discussion, should, on a lagged basis, follow the adjustment of policy rates as well as the BOJ's intervention, through its auctions, in the foreign exchange market, or anytime there are significant issues pertaining to monetary policy.