Jamaica’s central bank kept its key interest steady, saying this is based on its continued view this rate is generally appropriate to support inflation remaining within its target of 4.0 to 6.0 percent over the next two years.
The Bank of Jamaica (BOJ) left its rate on overnight deposits at 0.50 percent, unchanged and at a historic low since August 2019, but added the outlook remains “highly uncertain” in the context of the ongoing Covid-19 pandemic and it “stands ready to implement other policy measures, if the need arises.”
In a statement from June 29, BOJ said the risks to its forecast for gross domestic product were slightly skewed to the upside as the government’s decision to re-open the country’s ports to incoming passengers in June could improve growth prospects, along with the prospects of stronger economic activity in the United States.
However, material risks to the downside remain, BOJ added.
In its May outlook, BOJ forecast GDP would contract an average 5.1 percent in the current fiscal year, which began April 1, and then partially recover in fiscal 2021/22 with growth ranging from 2.5 to 5.5 percent.
Jamaica’s economy stagnated in the fourth quarter of 2019, with GDP at zero percent growth year-on-year, down from growth of 0.6 percent in the third quarter, with output hit by measures to contain the pandemic.
On a quarterly basis, GDP shrank 0.5 percent from the third quarter following a quarterly contraction of 0.2 percent in the third quarter, with the decline mainly seen in hotels and restaurants, mining, wholesale and retail, transport, storage and communications, and other services.
Inflation declined to 4.8 percent in March from 6.0 percent in February.
Although BOJ left its rate steady at its last policy meeting on May 20, on May 15 it lowered the cash reserve requirement by 200 basis points to 5 percent to boost liquidity in the financial system by releasing some J$14 billion to deposit-taking institutions. It also cut the foreign currency cash reserve requirement by 200 points to 13 percent, which returned some US$70 million to institutions.
In May BOJ forecast inflation would average 4.4 percent over the next two years and today it said the current assessment is inflation is likely to be slightly higher due to higher agricultural, energy and transport prices, and upward pressures from higher-than-expected demand in connection with an earlier-than-expected re-opening of the economy and a more expansionary fiscal stance.
Jamaica’s dollar has firmed slightly this month but remains down 5 percent since the start of this year at 140.0 to the U.S. dollar.
The Bank of Jamaica issued the following statement:
“Bank of Jamaica announces its decision to hold the policy interest rate (the rate offered to deposit-taking institutions on overnight placements with Bank of Jamaica) unchanged at 0.50 per cent per annum.
The decision to hold the policy rate unchanged is based on the Bank’s continued view that monetary conditions are generally appropriate to support inflation remaining within the target of 4.0 per cent to 6.0 per cent over the next two years. The economic outlook for Jamaica remains highly uncertain in the context of the ongoing COVID-19 pandemic. Bank of Jamaica will continue to assess incoming data and stands ready to implement other policy measures, if the need arises.
Annual inflation at March 2020, as reported by the Statistical Institute of Jamaica, was 4.8 per cent, lower than the 6.2 per cent at December 2019 and firmly within the target range. Underlying or core inflation, which measures the change in prices excluding agricultural food and fuel prices, remained relatively low at 3.3 per cent.
At our assessment in May 2020, Bank of Jamaica’s forecast was for inflation to average 4.4 per cent over the next two years. The forecast was mainly predicated on the impact of the COVID- 19 pandemic, which was expected to induce a deceleration in agricultural food prices and a decline in energy and transport related costs. In addition, the forecast included the impact of administered price increases.
Bank of Jamaica’s current assessment is that inflation is likely to be slightly higher than previously forecasted over the forecast period but is still expected to track within the target range of 4.0 per cent to 6.0 per cent. This updated view of the inflation outlook stems from expectations for higher agriculture prices as well as higher energy and transport costs, compared with the Bank’s earlier forecast. In addition, upward price pressures could emanate from higher than expected aggregate demand, consistent with an earlier than expected re-opening of the economy as well as a more expansionary fiscal stance.
Other Economic Variables
At the assessment in May 2020, Bank of Jamaica’s forecast anticipated that, for the current fiscal year (June 2020 to March 2021 quarters), the Jamaican economy would contract, on average, by 5.1 per cent. In the following year (up to the March 2022 quarter), the Jamaican economy is projected to partially recover, with real GDP growth in the range 2.5 per cent to 5.5 per cent. The fall in real GDP in FY2020/21 was expected to be mainly reflected in Hotels & Restaurants, Mining, Wholesale & Retail, Transport, Storage & Communication and Other Services. These expected declines are largely based on the adverse impact of the global COVID- 19 pandemic on travel, production, distribution and entertainment activities.
At our assessment in May 2020, the current account deficit (CAD) of the balance of payments (BOP) was projected to deteriorate to 7.5 per cent of GDP for FY2020/21, mainly due to the forecast of a sudden stop in visitor arrivals due to the closure of borders to visitors until September 2020, as well as a significant decline in remittance inflows. The CAD was projected to improve gradually over the medium term. Given recent developments, particularly the earlier than anticipated re-opening of Jamaica’s borders in mid-June 2020 and a stronger performance of remittance inflows, the CAD could likely be lower than previously anticipated.
Bank of Jamaica remains committed to ensuring that inflation remains low and stable within its target and, at the same time, is prepared to take all necessary actions to ensure that Jamaica’s financial system remains sound.
The next policy decision announcement date is 18 August 2020.”
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