Wednesday, February 21, 2018

Jamaica cuts rate another 25 bps, inflation risks balanced

       Jamaica's central bank lowered its policy rate by another 25 basis points to 2.75 percent and while it still expects inflation to remain within its target range over the next 8 quarters it turned more optimistic by saying the risks to this forecast were now balanced as compared with last month when it said the risks were skewed to the downside.
      The Bank of Jamaica (BOJ), which on July 1, 2017 adopted the overnight deposit rate as its new signal rate instead of the rate on 30 certificates of deposit, has now cut its key rate by a total of 100 basis points since July when the rate was cut to 3.75 percent.
       The BOJ said the rate cut was aimed at supporting "accelerated expansion in credit and economic output" while the persistence of excess liquidity in the domestic money market continues to signal reductions in market interest rates.
       Jamaica's inflation rate declined to 4.8 percent in January from 5.2 percent in December and the BOJ expects inflation to remain within its 4.0 to 6.0 percent target over the next two years, with the outlook reflecting its expectation of continued fiscal consolidation and low inflation expectations.
      Jamaica's economy remains sluggish although forecasts show a "modest acceleration" in growth over the next two years, the BOJ said.
       Jamaica's Gross Domestic Product grew by an annual 0.8 percent in the third quarter of last year, up from a contraction of 0.1 percent in the second quarter.
        One upside risk to inflation stems from "overheating" in the U.S., which boosts demand for Jamaica's goods and services. While this may prompt tighter monetary conditions in the U.S., the BOJ said this impact on the domestic economy would be eased by a fall in Jamaica's sovereign risk premium.

      The Bank of Jamaica (BOJ) issued the following statement:

"Bank of Jamaica announces its decision to lower the policy interest rate (the rate offered on overnight placements with the Bank) by 25 basis points to 2.75 per cent effective 21 February 2018.

This policy stance reflects the Bank’s assessment that inflation for the next eight quarters should remain within the target of 4.0 per cent to 6.0 per cent, with the risks to this forecast assessed to be balanced.

The outlook for inflation reflects the expectation for continued fiscal consolidation in line with the fiscal rules. Recovery in the real economy continues to be sluggish even as projections show a modest acceleration in economic growth over the next two years. Inflation expectations remain low and broadly anchored around the Bank’s target. One upside risk to inflation is that overheating in the US will support higher demand for Jamaica’s goods and services. Strong growth in the US may also prompt tighter monetary conditions there but the pass through of this effect to the domestic economy may be ameliorated by continued reductions in Jamaica’s sovereign risk premium.

The Bank’s decision to lower the policy rate is aimed at supporting accelerated expansions in credit and economic output. The key macroeconomic indicators continue to reflect positive trends. International reserves continue to expand, the current account of the balance of payments is projected to remain at sustainable levels and the fiscal accounts remain strong. The persistence of excess liquidity conditions in the domestic money market also continues to signal reductions in market interest rates."


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