Sun | Oct 17, 2021

BOJ engages toolbox for inflation control

Rate rise among monetary levers used by several countries to cool prices

Published:Friday | October 8, 2021 | 12:09 AMHuntley Medley - Associate Business Editor
Wayne Robinson, senior deputy governor, Bank of Jamaica.
File Wayne Robinson, senior deputy governor, Bank of Jamaica.

The central bank is pushing back at the critics of its decision last week to deliver on its August warning and to triple the rate-policy interest rates, effective September 30.

When the central bank flexed its newly independent muscles last week, adding a percentage point to the overnight interbank rate it pays on cash parked at the Bank of Jamaica, BOJ, by banking or deposit-taking institutions, it pointed out that the rate rise was one of a suite of policy actions it was pursuing to tamp down inflation.

This week, the central bank provided additional information on its monetary tools aimed at beating back inflation, which in August overshot the upper limit of the 4-6 per cent target agreed with the government, at 6.1 per cent.

“You can be assured that the bank will remain watchful of the market and will be proactive to ensure that movements in the exchange rate do not threaten the inflation target,” Wayne Robinson, the BOJ’s senior deputy governor, said on Tuesday in response to Financial Gleaner queries about the precise foreign currency market interventions which the central bank will be pursuing to cool inflation.

“The bank’s decisions to intervene in the foreign exchange market are guided by its daily interactions with market participants, from which it is able to quickly discern the emergence of excess demand conditions. In a context where these interactions and the bank’s projections for supply (inflows) and demand (outflows) of foreign currency suggest the emergence of disorderly market conditions, and where the potential exists for the changes in the exchange rate to threaten the bank’s inflation objective, the bank will sell foreign currency through its B-FXITT operations,” Robinson explained.

The forex interventions are in addition to the tightening of Jamaican dollar liquidity, which the central bank embarked on in recent weeks.

“The bank has already tightened its liquidity management operations by increasing the volume of 30-day CDs (certificates of deposits) issued, and by reducing the quantum of liquidity that it offers DTIs under its 14-day facility. We will continue with these operations, guided by the net flow of liquidity in the financial system and, ultimately, the response of market interest rates to the combined suite of policy changes that the bank has implemented,” Robinson said.

The central bank also tacked on another percentage point to the rates offered on CDs as of October 4, bringing its short-term paper yield to 2.0 per cent. Market watchers have pointed to yields inching up since August.

Having upped the overnight interbank rate, the BOJ also gave notice that further rate hikes could be in Jamaica’s immediate future, effectively heralding the end of the record-low interest rate regime and the abandonment of its COVID-19 economic accommodation to ease the plight of businesses — a policy broadly pursued by the Government since the start of the pandemic.

The rate hike has come in for heavy criticism, the latest being the Private Sector Organisation of Jamaica, which said in a statement on Thursday there is reason for concern that BOJ’s tighter monetary stance presented a risk to Jamaica’s growth prospects in the medium term.

PSOJ cited and endorsed IMF writings in October, which argued that central banks “should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics”.

The BOJ, it added, should “utilise its unquestioned credibility to lead a communication effort that more directly emphasizes for all economic actors the transitory nature of the inflation we are experiencing, while expressly clarifying the specific economic circumstances that would give rise to further changes in the policy rate and continuing to assure the country that it stands ready to utilize effective policy tools to head off embedded inflation should that need arise.”

Depending on the effective pass-through to the banking system, the rate rise could set off a corresponding increase in bank lending rates that could further squeeze credit to the productive sector, and hike household credit through higher car loans, credit card and mortgage rates.

With the move, BOJ joined a growing list of albeit larger emerging economies, several of which are in Latin America, that have reached for the interest rate lever to douse simmering inflation trends, even ahead of any such move by big economies, including Britain and the United States.

Emerging economy Brazil has already increased rates three time this year, coming from a low of two per cent to 2.75 per cent in February to 3.5 per cent in April and 5.25 per cent in August. Peru moved from 0.25 per cent to 0.5 per cent in July.

In June, Chile tacked on a quarter of a percentage point to its pandemic-low benchmark rate, moving from 0.5 per cent to 0.75 per cent, then doubled the rate to 1.5 per cent in August. Mexico had lowered its interest rate from 7.5 per cent at the start of 2020 to 4.0 per cent in February of this year, but has since hiked it in August to 4.5 per cent.

Last month, Norway’s Norges Bank became the latest developed country’s central bank to increase interest rates, raising its zero per cent policy rate to 0.25 per cent. Norges said rates could reach 1.7 per cent by 2024. It followed rate increases by Russia, Hungary and the Czech Republic in June. In August, South Korea also upped rates from 0.5 per cent to 0.75 per cent.

BOJ’s rate shift has been described by some analysts as a direct outcome of the central bank’s newly minted independent status, and whose assessment is that the government, fearing political backlash, would have been timid to make borrowing more expensive for the productive sector and consumers while the economy is still in the doldrums of a massive pandemic-induced contraction.

Voicing its disagreement with the rate increase, the first since December 2008, when the BOJ jacked up the policy rate from 14.65 to 17 per cent, the Jamaica Manufacturers and Exporters Association labelled the central bank’s action as “misguided” and is advocating for a reversal.

“A move of this nature by the central bank will result in higher lending rates to consumers, including small manufacturers and exporters, affecting their ability to pay their bills and keep staff employed,” the business group said.

It has been demonstrated in the past, it added, that the depreciation of the Jamaican dollar has more to do with foreign currency shortages and the level of confidence in the Government’s economic policies than adjustments in interest rates.

“The approach of the BOJ is academic and will fail to keep either the exchange rate stable or to moderate the rate of inflation,” the peeved producers predicted.