The Bank of Jamaica is projecting inflation in the December quarter will be in the range of three to four per cent on expectations of higher commodity prices, and says the Jamaican economy may contract by as much as 1.7 per cent due to the effects of Hurricane Sandy.
The central bank also estimates that economic activity was flat or may have contracted slightly in the September quarter, and disclosed that amid the uncertainty it spent a net US$215 million to defend the Jamaican currency.
Hurricane Sandy, which hit Jamaica in late October, is expected to lead to a 0.7 percentage point increase in domestic food prices for the rest of the fiscal year.
The central bank is also projecting higher oil prices due to the expected seasonal increase in international demand for winter.
The BOJ reaffirmed that the inflation forecast for the fiscal year remains in the range of 7.5 per cent to 9.5 per cent, down from the 10 per cent to 12 per cent previously projected, but said downside risks relating to continued tabulations on the impact of the hurricane and the performance of international commodity prices could derail the forecast.
For the quarter ended September 2012, headline inflation was recorded at 2.1 per cent, slightly above the forecast range of 1.0 per cent to 2.0 per cent.
"Inflation in the quarter mainly reflected the impact of seasonally lower supplies of domestic agricultural commodities, higher demand associated with back-to-school preparations and the holidays in August, the lagged effect of the Government's tax measures as well as increases in international grain prices," said BOJ Governor Brian Wynter at the bank's quarterly press briefing on Wednesday.
performing above forecast
Additionally, he said an increase in the national minimum wage during the quarter also contributed to inflation performing above forecast.
In addition to higher inflation, the BOJ is projecting a contraction in economic output influenced by preliminary estimates of damage caused by Hurricane Sandy both in Jamaican as well as the East Coast of the United States, the country's major trading partner.
"For the December quarter, the bank is expecting a contraction in economic output," said Wynter.
"... Once we have had further information on the impact of Hurricane Sandy - and if I may say, estimating the impact on prices, although challenging, is a lot easier than estimating the impact on output overall - and work is continuing, but we do expect to see a decline in the December quarter," the governor said.
The BOJ is projecting that output could decline by 0.7 per cent to 1.7 per cent.
Stopover visitors from the US East Coast account for almost 19 per cent of visitors from the United States, which would have been affected in the context of cancellations in stopover tourist arrivals due to the impact of the hurricane in both countries, as well as the diversion of cruise lines from Jamaica during the hurricane.
The forecast for lower output in the December quarter also reflects the impact of continued weakness in the domestic economy, slower global growth and tight fiscal policy, Wynter said.
But he continued to telegraph optimism.
"The challenges in the world and domestic economic environment can create new opportunities for growth and development," he told the briefing.
"These challenges should cause us to be more innovative and creative in managing our resources. In this regard, I urge you to take full advantage of the window of opportunity that an extended period of relatively low and stable interest rates creates for investment in real activity."
The central bank governor was also upbeat about the prospects for an agreement on the medium-term economic programme being negotiated with the IMF - Wynter is a member of the Jamaica's negotiating team - saying a deal would temper market uncertainties reflected in demand pressures in the foreign-exchange market and increased investor preference for short-term domestic instruments.
The net reserves fell below US$1.3 billion in the September quarter, due to a net US$214.8 million spent on defending the Jamaican dollar.
Wynter said the stock of gross international reserves stood at US$2.1 billion, representing 14.1 weeks of goods and services imports. The international benchmark is 12 weeks.
At the same time, the governor acknowledge that there are risks to the outlook which include increased geopolitical tensions, adverse weather, stronger-than-anticipated global growth which could lead to higher prices for international commodities and, consequently, higher domestic inflation, as well as a greater-than-expected impact from Hurricane Sandy that could alter the current forecast for inflation.