Tuesday, October 2, 2018

Jamaica maintains rate as private sector credit expands

     Jamaica's central bank left its policy rate steady at 2.0 percent for the second time, saying the accommodative monetary policy aims to reinforce signs of rising growth of credit to the private sector with economic activity expected to help inflation return to the target.
     The Bank of Jamaica (BOJ), which in August said it would ease its policy further if private sector credit didn't continue to expand, added it expects the increasingly accommodative conditions in the domestic market to lead to slightly higher pace of growth in credit than earlier expected.
     The BOJ, which has cut its benchmark overnight deposit rate by 125 basis points this year - most recently in June - said domestic demand is likely to strengthen gradually while economic growth, while modest, is accelerating, supported by faster credit growth.
     Jamaica's economy expanded by a faster-than-expected 2.2 percent year-on-year in the second quarter, up from 1.4 percent in the first quarter, net international reserves are above the level deemed adequate, market interest rates are at record lows and fiscal performance continues to be strong.
     Since July 2017, when BOJ adopted the overnight deposit rate as its policy rate, it has lowered the rate by a total of 175 basis points.
     Credit to the private sector grew by an annual 16.7 percent in July, or 13.1 percent in real terms, compared with growth of 15.9 percent in June and 11.2 percent in July 2017.
     The BOJ said the decision to keep the rate steady reflected its view that inflation will be within the 4.0 to 6.0 percent target range by the March 2019 quarter and then rise to the middle of the target.
     Jamaica's inflation rate has been rising in the last three months to 3.9 percent in August from a 2018 low of 2.8 percent in June, and BOJ's outlook for inflation includes the impact of the faster-than-expected fall in the exchange rate of the Jamaican dollar in April and May.
     At the end of April the Jamaican dollar began falling before stabilizing in September. Since then it has appreciated to trade at 134.3 to the U.S. dollar today, up 2.4 percent since early September but down 7.7 percent since the start of the year.
     Last month International Monetary Fund staff and Jamaica's government reached agreement on the fourth review under its stand-by arrangement from November 2016 that will make an additional US$226 million available, bringing the total accessible credit to about $1.2 billion.
     Jamaica still considers the credit, which will total $1.64 billion, as precautionary. As part of the agreement, Jamaica is expected to approve a new central bank act that establishes BOJ as an independent central bank with price stability as its primary mandate.
     The IMF's executive board is tentatively scheduled to decide on the latest agreement in November.
     In its statement, the IMF said Jamaica was implementing its program, with the government's primary surplus exceeding the target by 0.7 percent of Gross Domestic Product.
    The IMF forecast economic growth in the 2018/19 fiscal year of 1.4 percent and then rise to around 2 percent in the medium term, supported by mining and construction.

     The Bank of Jamaica issued 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 be within the 4.0 per cent to 6.0 per cent target range by the March 2019 quarter. Thereafter, inflation is projected to rise to the middle of the target. The Bank’s assessment is supported by the twelve- month inflation rate at August 2018 which rose to 3.9 per cent from 2.8 per cent in June 2018.

The Bank’s outlook for inflation for the remainder of 2018 and the first part of 2019 continues to be predicated on the expectation that agricultural food prices will rise from the low levels recorded in April and May 2018, elevated international oil prices and the faster-than-expected exchange rate depreciation in the May to August period. In addition, while the Bank’s July2018 survey indicated that private sector expectations of inflation twelve months ahead remain anchored in single digits (5.2 per cent), inflation expectations were higher than in the previous survey.

The risks to the inflation forecast are skewed to the upside, implying that inflation may return to the target more quickly than anticipated. Over the short run, agricultural prices may rise faster than expected while energy-related prices may move higher than initially projected. International grains prices, which have been rising, may trend upwards faster than earlier anticipated.

Downside risks to the inflation forecast include weaker-than-projected domestic and international demand and lower-than-projected international commodity prices.

Economic Outlook
Macroeconomic indicators continue to be positive. Net international reserves are above the level deemed to be adequate; real GDP growth, while modest, is accelerating; market interest rates are at record lows; and fiscal performance continues to be strong.

Recent developments suggest that, while there remains some slack in the economy (i.e.,projected GDP growth is less than the Bank’s estimate of potential GDP growth), medium-term domestic demand conditions are likely to strengthen gradually against the background of continued buoyancy in the global economy and the accommodative monetary conditions induced by the Bank over the past year. In this context, GDP grew by 2.2 per cent for the June 2018 quarter, which was above the Bank’s estimate and above the growth rate for the March 2018 and the June 2017 quarters.

The pick-up in GDP growth was supported by faster credit growth. Credit extended by deposit- taking institutions (DTIs) to the private sector expanded year over year by 16.7 per cent at July 2018 (13.1 per cent in real terms), compared to growth of 15.9 per cent (12.7 per cent in real terms) at June 2018 and 11.2 per cent (6.7 per cent in real terms) at July 2017. Emerging buoyancy in the credit market was reflected in an overall improvement in credit market conditions in the June 2018 quarter, relative to the March 2018 quarter. The Bank’s survey ofcredit conditions indicated that better lending conditions were evident in the quarter for both secured and unsecured loans for all business sizes. The survey also indicated that, on average, interest rates on new loans in local currency fell by 74 bps to 14.56 per cent during the June 2018 quarter and mainly reflected reductions for loans to micro and small enterprises and loans for personal purposes.

Bank of Jamaica’s decision to maintain an accommodative policy stance seeks to reinforce these positive emerging signs of accelerated private sector credit growth. Monetary conditions in the domestic market are increasingly accommodative and credit is likely to grow at a slightly higher pace than was previously anticipated. The increase in economic activity is expected to support the return of inflation to the target with greater certainty.

The next policy decision announcement date is 16 November 2018."



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