Jamaica's central bank left its policy rate steady at 2.0 percent but said it "will make further cuts to the policy rate" if the current expansion of private sector credit does not continue.
The Bank of Jamaica (BOJ), which has cut its benchmark overnight deposit rate by 125 basis points this year, said the decision to maintain the rate comes amid signs of a pickup in the rate of expansion in private sector credit and reflect its view that inflation will rise towards the lower end of its target by March 2019 and approach the middle of the target range thereafter.
"However, Bank of Jamaica is closely monitoring these credit conditions and will make further cuts to the policy rate if required," BOJ said, adding that economic data continue to be positive, international reserves are at healthy levels and the current account will remain at a sustainable level even if it is projected to widen.
Jamaica's inflation rate picked up to 3.2 percent in July from 2.8 percent in June but is below the lower bound of the BOJ's target range of 4.0 - 6.0 percent target range.
It was the highest rate of inflation in the last four months, with the central bank saying the current path still reflects slack in the economy.
However, the BOJ said its outlook for inflation for the rest of this year and the first part of 2019 is largely predicated on an expected increase in agricultural prices, continued elevated oil prices and higher economic growth, supported by this year's policy easing.
Since July 2017, when BOJ adopted the overnight deposit rate as its signal rate, it has lowered the rate by a total of 175 basis points.
Jamaica is in the midst of a structural reform program supported by the International Monetary Fund (IMF) that includes a new central bank act, expected to be approved in October.
As part of the US$1.64 billion IMF agreement from November 2016, Jamaica's finance ministry in September last year approved a medium-term inflation target for the first time and the BOJ has also taken steps to enhance its policy transparency and modernized the foreign exchange market.
The new central bank act will establish the BOJ as an independent central bank that will be accountable for maintaining price stability as its primary mandate, formalizing the current regime that Bryan Wynter, BOJ governor, has described as 'inflation-targeting lite.'
Jamaica's Gross Domestic Product grew by an annual 1.4 percent in the first quarter of this year, up from 1.2 percent in the previous quarter.
The Bank of Jamaica released the following statement:
"Bank of Jamaica announces its decision to hold the policy interest rate (the rate offered on overnight placements with Bank of Jamaica) unchanged at 2.00 per cent.
This decision reflects the Bank’s assessment that inflation, currently below target, will rise towards the lower end of the target of 4.0 per cent to 6.0 per cent by the March 2019 quarter and approach the middle of the target range thereafter.
The Bank’s outlook for inflation for the remainder of 2018 and the first part of 2019 is largely predicated on an expected normalization (increase) in agricultural prices, oil prices remaining elevated and higher domestic GDP growth, the latter driven in part by the accommodative monetary conditions induced by the central bank over the past year. In the medium term, the Bank’s inflation outlook continues to reflect a gradual acceleration in economic activity (growth in real GDP). However, the path for inflation continues to reflect some slack in the economy (ie, projected GDP growth is less than the Bank’s estimate of potential GDP growth) and therefore continued risk of inflation falling below the baseline projection.
The decision to maintain the policy rate, following downward adjustments of 100 basis points earlier this year, is in the context of the signs that have emerged of a pick-up in the rate of expansion in private sector credit. If this acceleration in private sector credit growth continues, the resulting increase in economic activity will support inflation returning to the target of 4.0 per cent to 6.0 per cent with greater certainty. However, Bank of Jamaica is closely monitoring these credit conditions and will make further cuts to the policy rate if required.
Macroeconomic indicators continue to be positive. Net international reserves are at healthy levels and the current account of the balance of payments, while projected to widen, will remain at sustainable levels. Market interest rates are also at record lows and employment continues to expand.
The next policy decision announcement date is 02 October 2018"
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