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Jamaica cuts rate 25 bps as inflation target approved

November 28, 2017 by CentralBankNews   Comments (0)

       Jamaica's central bank lowered its new policy rate by another 25 basis points to 3.25 percent, saying this "is consistent with positive economic indicators and the view that inflation will remain comfortably within the target of 4.0 percent to 6.0 percent over the next four to eight quarters."
       The Bank of Jamaica (BOJ), which on July 1 adopted the overnight deposit rate as its new signal rate instead of the rate on 30 certificates of deposit, also cut the policy new rate in August and has now cut it by a total of 50 basis points so far this year.
       "Government's continued strong commitment to fiscal consolidation is also a factor," BOJ Governor Brian Wynter added in a speech about the bank's pivot to inflation targeting as part of the release of the bank's quarterly monetary policy report.
       In addition to his comments on the new foreign exchange regime from July, Wynter said the minister of finance and the public service had approved for the first time a medium-term inflation target for the central bank, with the target set at 4.0 to 6.0 percent.
       Under the inflation-targeting regime, the BOJ will adjust its monetary policy on the basis of its medium-term inflation forecast, with the rate increased if the assessment suggest that inflation will exceed 6.0 percent, or the upper bound of the target.
       Conversely, the policy rate will be reduced if inflation is projected to fall below the lower bound of the target, i.e below 4.0 percent, Wynter said.
        Jamaica's headline inflation rate rose slightly to 4.7 percent in October from 4.6 percent in September while the BOJ's preferred measure of core inflation (CPIAF, or inflation that excludes agriculture and energy) remains stable below 4.0 percent and inflation expectations remain broadly anchored around the bank's target.
        In its latest inflation report, the BOJ forecasts that inflation will remain unchanged for the December quarter before easing to end the fiscal 2017/18 year in April at 4.4 percent, below July's 4.6 percent forecast due to weaker than expected domestic demand in the first half of the year and slower-than-expected depreciation of the Jamaican dollar.
       Over the next 2 years inflation is expected to remain around 4.5 percent over the next 2 years and then slowly approach 5 percent by fiscal year 2019/20.
       Supported by the International Monetary Fund (IMF), Jamaica's government is in the midst of a four-year structural reform program that includes changes to the Bank of Jamaica Act and giving the central bank a larger toolkit and strengthening its balance sheet.
       Jamaica's government is also committed to maintaining exchange rate flexibility and limiting foreign exchange interventions to smoothing excessive volatility, the IMF said last month.
       Improved macroeconomic stability is boosting economic activity, with the unemployment rate dropping to 11.3 percent in July, down 1.6 percentage points year-on-year, and the lowest rate since July 2009.
       But Wynter said this suggest that Jamaica is beginning to approach its capacity limits for skilled labour, which means the pool of skilled workers has to be raised to ensure sustained economic growth without inflation.
       Jamaica's economy contracted by an annual 0.1 percent in the second quarter after a 0.1 percent gain in the first quarter but the BOJ expects growth between 0.5 to 1.5 percent in the third quarter.
       For 2018/19 BOJ forecast growth in a range of 2.0 to 3.0 percent, mainly due to higher output from mining, hotels and restaurants, forestry and fishing, manufacturing, and electricity and water.
       The IMF in October forecast real Gross Domestic Product growth in 2017/18 of 1.6 percent, up from an estimated 1.3 percent in 2016/17, and 1.9 percent growth in 2018/19.
        In July the BOJ introduced the Foreign Exchange Intervention and Trading Tool (B-FXITT) that aims to reassure market participants about the availability of foreign exchange in addition to enhancing efficiency and transparency.
       The BOJ has already noticed increased inter-dealer foreign exchange trading and been able to reduce its sales to the market and is now preparing to begin buying operations under B-FXITT as it reduces its footprint in the market.
      "The foreign exchange market has at last moved away from being a market where the exchange rate more or less constantly dries in one direction only to a more normal two-way market where the exchange rate is just as likely to move up as it is to move down, in other works, a more modern market with a flexible exchange rate that both produces and benefits from a fairly valued currency," Wynter said.
       Since the start of this year the Jamaican dollar has experienced at least 3 cycles of upswings followed by downswings, Wynter said, adding that for the year to Nov. 23, the Jamaica dollar had appreciated by 1.9 percent compared with depreciation of 7.7 percent over the same period of the previous year.
       Today the Jamaican dollar was trading at 125.8 to the U.S. dollar.

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