Thu | Jan 17, 2019

BOJ rate drop expectation misleading

Published:Saturday | April 18, 2015 | 12:00 AM


I think the move by the Bank of Jamaica (BOJ) to reduce the short-term interest rate is an interesting one. According to the Jamaica Gleaner article captioned 'Bank of Jamaica cuts interest rate', the BOJ expects a reduction in the short-term interest rate to cause consumer prices to remain low over the next year. This, I believe, is misleading.

A lower interest rate will increase productivity, in that more companies will be inclined to

borrow at lower rates to invest in their operations, which will in turn boost production and create jobs.

At the same time, a reduction in the interest rate can cause inflation to increase. Lower interest rates will put more borrowing power in the hands of consumers. The more consumers borrow and spend, the more the economy will grow, which will result in an increase in aggregate demand, thus pushing up prices, creating demand-pull inflation.

Therefore, it is hard to see how a reduction in interest rate will cause consumer prices to remain low in the short run.


Maryland, USA