Tue | Dec 6, 2022

More pressure: Businesses again urge BOJ rate hike reprieve

Published:Thursday | September 29, 2022 | 12:06 AMHuntley Medley/ - Associate Business Editor
The entrance to the Bank of Jamaica, Nethersole Place, Kingston.
The entrance to the Bank of Jamaica, Nethersole Place, Kingston.

The Bank of Jamaica, BOJ, will make its next monetary policy announcement on Thursday, having already raised by 550 basis points since late September last year, its benchmark policy rate paid on cash which deposit-taking institutions park at the central bank.

In a continuing campaign against the rate rises, already the private sector is bristling at the possibility of another rate increase this week that will push loan rates up further for consumers and businesses as the central bank seeks to rein in inflation, which is still tracking way above the 4 to 6 per cent target range.

In a joint statement on September 23, the Private Sector Organisation of Jamaica, PSOJ, and Jamaica Manufacturers and Exporters Association, JMEA, urged the BOJ to stay any further raise rise action in order to avoid adverse economic consequences. The plea, by itself is unlikely to influence the consideration of the BOJ’s Monetary Policy Committee this week, with the MPC and central bank Governor Richard Byles having laid out last month that only hard cold data would determine the bank’s next policy response.

“While the Jamaican economy has shown resilience as evidenced by the latest quarterly GDP growth numbers of 5.7 per cent, the private sector is concerned that further tightening of monetary policy by the BOJ would slow domestic demand to levels which would put Jamaica’s growth prospects of 2.5 to 4.5 per cent for 2023 at risk,” private sector leaders said in their statement.

The business leaders are wary of further rate hikes spooking consumers and investors leading to delayed purchases and shelved investments as a result of higher loan rates and debt servicing costs. Apart from negative local economic dynamics, the PSOJ and JMEA are fearful that similar central bank rate rise actions in the economies of Jamaica’s major trading partners of the United States and the United Kingdom, UK, are courting a recession that could have disastrous consequences for import and tourism-dependent Jamaica.

“Of concern, the UK is showing signs of a recession with a slowdown in the US economy expected in coming quarters. This marks a material risk for Jamaica, which must be proactively managed given our relatively vulnerable economic position. Amidst the challenges from the existing monetary policy by the BOJ and the headwinds from slower growth in the US, Jamaica faces the possibility of headwinds to economic growth and employment,” the joint statement by the business groups said.

“The private sector, therefore, cautions the BOJ against further interest rate increases as it fulfils its mandate of containing inflation,” it added.

The PSOJ and JMEA are holding the central bank to its pronouncement in August that the policy rate, at the level it reached a month ago, was appropriate, with the business leaders stating that the existing 6.0 per cent rate is already burdensome to businesses, and suggesting that no further increase was justified at this time.

“Further, even as we acknowledge the BOJ’s position that interest rates at six per cent are at ‘tentatively appropriate’ levels and in keeping with its policy objective, private sector firms and individual consumers are experiencing the brunt of the impact at these levels,” according to the PSOJ and JMEA.

Despite divergent priorities, the private sector and the BOJ have both taken some comfort from the downward trajectory of Jamaica’s monthly inflation numbers, noting that having peaked at 11.8 per cent in April, annual inflation fell off to 10.9 per cent at June and reached 10.2 per cent at July.

The inflation rate was unchanged at 10.2 per cent in August.

The business leaders say the declining inflation numbers resulted from moderation in world market prices for food, building materials such as lumber and steel, oil and shipping costs. The BOJ has attributed the fall-off in inflation to a combination of global market dynamics and its tight liquidity management, including rate increases, market intervention and the resulting exchange rate stability.

“The bank believes these conditions have not sufficiently solidified to ensure that inflation is sustainably on a downward path. There remain some significant risks of reversal. The fragile geopolitical situation with Russia, Ukraine and Europe in general with its knock-on commodity price risks, cannot be ignored. The reported labour shortages in selected sectors of the economy and pressures from our recent inflation experiences carry the potential for future wage adjustments that could be inflationary. High inflation in the US and other trading partners has prompted a programme of faster monetary adjustment which could cause capital outflows from Jamaica and exchange rate depreciation if domestic monetary policy is not properly aligned,” Byles said, sounding a note of caution last month.

Signalling that its policy rate increase stance was not immovable, however, the central bank committed to the possibility of it easing off the rate rise lever “if incoming data on inflation continues to track downwards, and the monetary adjustments in the US in particular are as expected”.

While the BOJ may stay its hand on the rate increase option this time around, it is not inclined to abandon monetary policy tightening outright. As the bank’s governor confirmed at a briefing on August 20, the central bank will continue its aggressive money market operations, sustain its buying and selling into the foreign exchange market and maintain the surrender system that requires banks to sell set percentages of their foreign currency intake to the central bank.

The BOJ’s position accepts that continuing rate increases will dampen growth and cause pain to borrowers, but it reasons that runaway inflation is an even more arduous burden for the entire country to bear. It’s monetary policy stance is buttressed by continuing monetary policy tightening by central banks in the US, Britain and the eurozone which have all made further policy rate increases this month.

huntley.medley@gleanerjm.com