Wednesday, February 20, 2019

Jamaica cuts rate 25 bps, reserve ratio to boost inflation

     Jamaica's central bank cut its policy interest rate by another 25 basis points to 1.50 percent and lowered the cash reserve for financial institutions to boost private sector credit and thus stimulate economic activity and help inflation rise more quickly to the bank's target.
     The Bank of Jamaica (BOJ) has now cut its key interest rate 9 times and by a total of 225 basis points since July 1, 2017 when it adopted the overnight deposit rate its new signal rate.
      BOJ said the latest rate cut reflects the forecasts that inflation will fall below its target at various times over the next 8 quarters before slowly approaching the midpoint of its 4.0 to 6.0 percent in the medium term.
     "Bank of Jamaica's decision to lower the policy rate is aimed at increasing the rate of expansion in private sector credit and is not aimed at influencing the exchange rate," BOJ said.
     The rate cut will be complemented by a reduction in the cash reserve requirement for financial institutions by 300 basis points to 9.0 percent, as of March 1, releasing $16.8 billion that institutions can use to provide more credit to households and businesses.
     In a separate statement, BOJ said today's cut in the reserve requirement is the first cut in a series over the next 12 months, with the timing and scope of the next cut determined by market conditions.
     Jamaica's inflation rate fell to 2.3 percent in January from 2.4 percent in December, the second month in a row it was below BOJ's lower limit.
     Jamaica's parliament is currently considering a bill that would make inflation targeting the cornerstone of monetary policy and recently launched a public campaign that includes a series of videos with reggae singers and dancers that extol the virtues of low and stable inflation.
     Jamaica's dollar has been volatile since August 2018, with the BOJ on Feb. 1 saying the fall in the value in December and January was due to several firms borrowing funds in foreign exchange on the local market, creating a temporary gap in demand and supply, something that is normal.
     The Jamaican dollar was trading at 134.5 to the U.S. dollar earlier today, down 5.1 percent this year.

     The Bank of Jamaica released the following press release:

"Bank of Jamaica announces its decision to lower the policy interest rate (the rate offered on overnight placements with Bank of Jamaica) by 25 basis points to 1.50 per cent.

This decision reflects Bank of Jamaica’s forecast that inflation, which is currently below the target of 4.0 per cent to 6.0 per cent, will fall below the target at various points over the next eight quarters in the context of low core inflation and large seasonal increases and reductions in agricultural prices. In the forecast, inflation will then slowly approach the midpoint of the target over the medium term.
For inflation to return to the target sooner, an increase in the rate of expansion in private sector credit is required. This would stimulate increased economic activity by businesses and households, which would support inflation returning to the centre of the target more quickly.

Bank of Jamaica’s decision to lower the policy rate is aimed at increasing the rate of expansion in private sector credit and is not aimed at influencing the exchange rate.

The reduction in the policy interest rate will be complemented by a reduction in the cash reserve requirement for deposit-taking institutions (“DTIs”) by three percentage points to nine per cent, effective 01 March 2019. This reduction is expected to release $16.8 billion to DTIs which will improve their ability to provide more credit to households and businesses at lower rates and on better terms. Further reductions will be made over the course of the year (see cash reserve requirement press release).

Annual inflation at January 2019 reported by STATIN was 2.3 per cent, down from 2.4 per cent at December 2018 and 4.8 per cent at January 2018. This is the second month in a row that the inflation rate fell below the target.

In the short term, Bank of Jamaica expects domestic agriculture prices to increase from the low levels to which they had subsided in January 2019 to more normal levels. It also expects that there will be some imported inflation caused by a moderate increase in crude oil prices in 2019. Furthermore, Bank of Jamaica expects that there will be some additional inflation from the improvement in domestic demand conditions resulting from its decisions to lower the policy rate during the past year.

In the medium term, the Bank’s inflation outlook reflects expectations for continued expansion in domestic demand, albeit moderate, and relative stability in crude oil prices.

The outlook for a moderate expansion in domestic demand is due to a lower projected growth rate in the global economy.
The risks to the inflation forecast are balanced. Inflation could be higher than forecasted because of higher-than-anticipated international commodity prices, particularly for crude oil, and production disruptions in the agriculture sector because of adverse weather conditions. Inflation could be lower than forecasted if domestic demand does not strengthen, thereby tempering the rate of increase in prices.

Other Economic Variables
Macroeconomic indicators continue to be positive. Foreign reserves are above the level deemed to be adequate, the current account deficit of the balance of payments remains low and sustainable, market interest rates are low, labour market conditions continue to improve and fiscal performance continues to be strong.
The next policy decision announcement date is 27 March 2019."

      The Bank of Jamaica also issued following statement regarding cash reserves:

"Bank of Jamaica will reduce the cash reserve requirement by three percentage points to nine per cent, effective 01 March 2019. The cash reserve requirement is the amount of money that deposit-taking institutions are required to hold at Bank of Jamaica against prescribed liabilities.

This is the first in a series of reductions that will be effected over the next 12 months. The timing and scope for the next reductions will be determined on the basis of assessments of market conditions over the course of the year.

This reduction will increase liquidity in the financial system by $16.8 billion and thereby support the expansion of credit to businesses and households at lower rates and at better terms.

The series of reductions of the cash reserve requirement is possible given of the entrenchment of macroeconomic stability in Jamaica.

The liquid asset requirement is also being reduced by the same amount, effective 01 March 2019.
No change is being made to the reserve requirements applicable to foreign currency prescribed liabilities."


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