Saturday, May 18, 2019

Jamaica cuts rate 11th time, reserve ratio 2nd time in '19

     Jamaica's central bank lowered its policy rate for the the 11th time and its cash reserve requirement for the second time this year, saying the series of cuts to the reserve requirement was possible "given the entrenchment of macroeconomic stability in Jamaica."
    The Bank of Jamaica (BOJ) announced the 50 basis point cut in its policy rate to 0.75 percent on its Twitter page, saying the new rate would take effect on May 20 and a press release will follow.
    BOJ was scheduled to release its second quarterly monetary policy report and an interest rate decision on Friday, May 17.
     BOJ has now cut its policy rate 11 times and by a total of 300 basis points since July 1, 2017 when it adopted the overnight deposit rate as its new policy rate as part of a major overhaul of its monetary policy framework, which this year even included reggae music videos, radio jingles and television adds to spread the word about inflation targeting.
     It is BOJ's third rate cut this year following cuts in February and March, with the rate cut 100 points this year.
     In a separate press release from May 15, BOJ announced the 200-basis-point cut to the reserve requirement to 7.0 percent, saying this would "increase liquidity in the financial system by $12.3 billion and thereby support the expansion of credit to businesses and households at a lower rate and on better terms."
     In February, when BOJ also cut its rate and reserve requirement, it said the cut to the requirement - or the amount of money deposit-taking institutions are required to hold at the central bank against liabilities - was the first in a series over the next 12 month.
     "The timing and scope for the next reduction will be determined on the basis of market conditions," BOJ said today, confirming its statement from February.
     The new reserve requirement will take effect on June 3, reducing the overall liquidity asset requirement to 21.0 percent.
      In April Fitch Ratings said it was expecting BOJ to lower its policy rate by an additional 25 basis points at its May meeting as inflation remains below its target and over the longer term rising energy and food costs would cause inflation to pick up, leading policy makers to raise rates in 2020.
      As a result of reforms to BOJ which have "seemingly caused inflation expectations to be firmly anchored", Fitch said it had lowered its long-term average inflation forecast for Jamaica to 5.50 percent from 6.0 percent for the years from 2021 to 2028.
     After decades of high inflation, fiscal deficits and growing debt, Jamaica and the International Monetary Fund (IMF) in 2013 agreed on a reform program that has helped bring down inflation from over 26 percent in mid-2008 to 4.0 percent in April this year.
     At the same time unemployment has fallen steadily from over 16 percent in 2013 to 8 percent in February this year while fiscal deficits over the last 20 years are now being replaced with surpluses, helping bring down the ballooning debts.
    In April the IMF concluded its Fifth review under the stand-by arrangement with Jamaica, saying all criteria were met, including tabling the new Bank of Jamaica Act that makes inflation-targeting a cornerstone of monetary policy, and an ongoing commitment to strengthen domestic institutions is needed as Jamaica prepares to exit from the IMF's financial arrangements later this year.
     "Unemployment is near all-time lows, business confidence is high, and the economy is estimated to have expanded by 1.8 percent in 2018, buoyed by mining, construction and agriculture," IMF said on April 22, adding international reserves were now comfortable under a more flexible exchange rate.
     IMF projected Jamaica's public debt would fall below 100 percent of gross domestic product for the first time since 2000/2001 to 98.7 percent in fiscal 2018/19 while the government was reducing the primary surplus by 1/2 percent to 6.5 percent of GDP for the fiscal 2019/20 budget without compromising the medium-term anchor to provide resources for security, infrastructure, school meals and transportation.
     IMF also said further monetary easing was needed to restore inflation to the midpoint of BOJ's target of 4-6 percent.
    "The BOJ's recent reduction in the reserve requirement on Jamaican dollar deposits will help make policy accommodative but further rate cuts are likely to be needed," IMF said, adding BOJ should also continue to reduce its footprint in the foreign exhange market by limiting sales to disorderly market conditions.


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