BOJ cuts inflation forecast
McPherse Thompson, Assistant Editor - Business
WITH CHANGES in the inflation environment, the Bank of Jamaica has revised downwards its forecast and outlook for increases in the prices of goods and services for fiscal year 2014-15 and beyond, Governor Brian Wynter said on Wednesday.
Inflation for November and December 2014 was negative, and for the December quarter as a whole it came out at minus 0.8 per cent, he said, noting that for calendar year 2014 it was 6.4 per cent, down from 9.5 per cent the year before.
"At this point, it's likely that inflation for fiscal year 2014-15 will come in below the seven to nine per cent target," Wynter said at a press briefing at the central bank's Kingston offices, called specifically to address the change in the inflation environment.
"Clearly, the rate of inflation is lower than we had originally anticipated and that's why I am saying to you that the inflation environment has changed," he said.
Noting that the inflation outlook has changed, the governor said the bank is currently engaged in the technical work required to inform the inflation target for fiscal year 2015-16 that will be set by Minister of Finance and Planning Dr Peter Phillips at the time of the Budget presentation in February.
"The bank sets monetary policy on a continuous basis," Wynter said, adding that "the decision we make on whether to raise or lower interest rates, and in setting monetary policy, we focus on our forecast for inflation six to nine months ahead".
The bank is now forecasting that the 12-month inflation rate to September 2015 will fall within the range of three to five per cent.
Wynter said: "The fiscal year inflation target will incorporate a projection that goes further and will have to take account of the prospect of whether we think oil prices might rise somewhat and, therefore, there may be factors that put that rate up further than the three to five per cent, but there may also be other factors that will help to keep it lower".
The governor noted that the depreciation in the value of the Jamaican dollar, which crossed the $115 against the US dollar just over a week ago on January 13, has been receiving some public attention lately.
He said the depreciation in the exchange rate for the fiscal year to January 20, 2015 has been 5.3 per cent, much slower than it was for the same period a year ago when it was 8.1 per cent.
"We now expect that the rate of depreciation will slow further," he said, while making mention of the two fundamentals that drive the exchange rate - the net current-account demand or the net demand that Jamaica has for goods and services from abroad, and the difference between inflation in Jamaica and the United States, Jamaica's major trading partner.
Wynter said the current-account deficit in Jamaica has narrowed dramatically and, therefore, net demand for foreign currency for imports was much lower. He added that the significant decline in the price of oil internationally "has turbocharged this process" and that the new outlook narrows the inflation differential substantially.
"So this is why we expect that exchange rate depreciation should now slow down," he added.
Regarding the two straight months of negative inflation, Wynter said it does not mean that the Jamaican economy is facing a deflationary period.
Noting that the forecast is for three to five per cent inflation for the 12 months to September 2015, "we have a good way to go to reach deflation," he said.
The fall in prices relates to the correction of agricultural prices that had increased during the drought, alongside steadily increasing agricultural production, as well as the effect of lower international oil prices.
The lower oil prices have not been fully passed through into lower prices in Jamaica, but "we will see some downward pressures on prices, arising from what has already happened internationally," Wynter said.