By Dennise Williams, Staff ReporterALTHOUGH THE Bank of Jamaica (BOJ) had relatively positive economic news for the September 2004 quarter, the economy was hit by inflation of 3.3 per cent for the month of October.
Speaking at this year's final quarterly economic review held at BOJ headquarters, Governor Latibeaudiere stated, "Only yesterday we received the inflation for October, which was 3.3 per cent for the month. We have not yet undertaken a comprehensive review of the details, but the major price impulses stemmed from items within the Food & Drink and Fuels & other Household Supplies group." In comparison with inflation for the 2004 September quarter of 2.8 per cent, Governor Latibeaudiere said, "The October numbers were a bit surprising to us and a major increase from our point of view." And based on the review of the economy, the BOJ predicts that:
"Inflation for the fiscal year April 2004 to May 2005 will be in the range of 10.5 to 11.5 per cent."
However, looking back to the three months ending September, representing the second quarter of Government's fiscal year, the outlook for the economy was positive, but going forward tight fiscal management will be necessary to contain inflation resulting from rising oil prices and the after-effects of Hurricane Ivan. However, during the quarter under review, the economy was buoyed by increasing inflows of hard currency from tourism and remittances, plus a healthy Net International Reserve (NIR) fund of US$1.8 billion.
INFLATION
Looking at the months of July, August and September, inflation was contained despite the effects
of rising world oil prices and two hurricanes. Governor Latibeaudiere said, "Inflation for that quarter was 2.8 per cent, broadly in line with the average for the September quarters of the past six years." However, when comparing the first six months of the fiscal year, April to September, with the same period of 2003/2004, the beast of inflation had been significantly tamed. "Inflation was 4.7 per cent for the first six months of this fiscal year, significantly lower than the 10.8 per cent recorded for the corresponding period of fiscal year 2003. The moderation in inflation was the result of two major factors: one was the tight management of base money by the Central Bank and the other, the relative stability that prevailed in the foreign exchange market," Governor Latibeaudiere said.
Another factor which helped to contain inflation was "the relative stability in the foreign exchange market, which tempered the impact of higher imported prices." The result of the tight money management is the "restriction of the core inflation to an estimated 1.1 per cent for the review quarter. I would also point out that since January this year there has been a declining trend in the 12-month point to point core inflation." Yet, the fact remains that there was a moderate level of inflation in the economy and the Governor explained the source of this. "Inflation for the quarter was influenced mainly by seasonal increases in the prices of agricultural commodities which was exacerbated by the effects of Hurricane Charlie. There were also administrative adjustments to the cost of postage and electricity, in addition to higher international oil prices."
INFLATION OUTLOOK FOR YEAR END
"With the effects of rising oil prices and the lingering agricultural shortages caused by two hurricanes, despite continued restraint in monetary policy, the marked reduction in inflation usually observed in the December quarters of previous years is not expected to materialise in 2004. This is based on the expectation of a shortfall in agricultural production. In addition, we expect the consumer basket to reflect the pass through of higher international oil prices. Based on our expectations, for the rest of the calendar year, we do not anticipate that headline inflation should go above 6 per cent for the December quarter."
FOREIGN EXCHANGE
Feeding into the inflation mix was the movement of the foreign exchange market. And against the United States dollar, at least, the Jamaican currency was able, with slight BOJ intervention, to remain stable. Explained Mr. Latibeaudiere, "Relative stability in the exchange rate was underpinned by growing investor confidence, which was largely attributable to continued improvements in the domestic economy. The weighted average selling rate of the domestic currency depreciated by 1.1 per cent in the September quarter, resulting in a depreciation of 1.4 per cent for the first six months of the fiscal year. This compared favourably with the depreciation of 5.9 per cent for the same period in 2003."
Notably, the depreciation experienced in the quarter under review, was the lowest since 2001.
For the near future, Governor Latibeaudiere stated, "Interest rate movement will be put on a holding mode for the time being." Looking back, he said, "The Bank reduced the rates on its open market instruments only once during the September quarter. This was in the context of a consistent threat of higher inflation stemming from the increase in oil prices and the uncertainty regarding global interest rates."
With regard to growth, the economy is estimated to have grown in the September quarter, with electricity and water, transport, storage and communication, and tourism being the major areas of growth. However, growth was slower than originally forecasted, due in part to the extensive hurricane damage to agriculture in the last month of the quarter.
Continued strong growth in the world economy should have a positive impact on Jamaica's exports, particularly alumina and tourism services. For the medium-term the overall prospects remain positive.
