The BOJ has erred
Dear Editor,
The Bank of Jamaica (BOJ) recently increased its overnight policy interest rate by 100 basis points, the first increase in 13 years.
The decision has taken many by surprise and several people have already expressed their disagreement with the decision. The reality of the situation is, the world, and Jamaica by extension, is going through a very difficult time brought on by the novel coronavirus pandemic. The pandemic has caused a significant decline in economic activity, resulting in reduced gross domestic product (GDP) and rising unemployment.
It is a very difficult time for all Jamaicans, and even the employed are experiencing some amount of anxiety, and rightly so.
Dr Adrian Stokes, financial economist and senior vice-president at the Scotia Group Jamaica, described the rate hike as misguided. The Jamaica Manufacturers and Exporters Association (JMEA) also strongly disagrees with the rate increase and is strongly recommending that the BOJ reconsiders its action in the near future.
The International Monetary Fund (IMF), in the July 2021 edition of its World Economic Outlook (WEO), strongly advises central banks against rate hikes in these times, indicating that such actions will result in a “double hit” for economies.
According to the IMF, “Central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics.” The report further states, “A double hit to emerging market and developing economies from worsening pandemic dynamics and tighter external financial conditions would severely set back their recovery and drag global growth below this outlook’s baseline.”
While it is understandable that the BOJ has a responsibility to maintain its inflation target of between 4.0 per cent and 6.0 per cent, it also has a responsibility to take the wider economic conditions into account.
As the IMF suggested in its report, a better response by the BOJ should have been to provide clear communication on the outlook for monetary policy so as to shape inflation expectations and resist the premature temptation of tightening financial conditions. Given that the inflationary pressures to a large extent are imported, the rate hike will only serve to exacerbate the worsening economic conditions.
One advantage of a monetary policy is that it can easily be reversed. The BOJ should admit it erred in judgement and reverse the rate hike. It’s never too late to do what is right.
Kemmehi Lozer k_lozer@yahoo.com