Should the Bank of Jamaica raise interest rates further next month - Part 1
The conventional wisdom is that for a central bank with a price stability mandate, monitoring measures of inflation expectations can provide an important gauge of how well it is meeting its goal. In this context, shaping the public’s inflation expectation through communications and policy actions is key.
For this reason, the Jamaica Chamber of Commerce (the JCC) supports an independent central bank and the overall policy of inflation targeting.
However, while understanding the central bank’s concern about rising inflation expectations - a key reason the Bank of Jamaica raised the policy rate - the JCC are not in favour of a further rise in interest rates this year.
They note that some key authorities, including the International Monetary Fund (IMF), and the US Federal
Reserve, see the current spike in inflation as “transitory” due to supply chain issues caused by the coronavirus pandemic.
Like the Private
Sector Organisation of Jamaica (PSOJ), the JCC agrees with the view of the IMF that “recent price pressures for the most part reflect unusual pandem- ic-related developments and transitory supply-demand mismatches”, and that “central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics.”
The JCC also note that the Bank of Jamaica is obliged to achieve its principal inflation objective “in a manner that recognises the growth and employment objectives” of the Government.
Addressing the BOJ’S statement that “We are not alone”, the JCC notes that “while a number of emerging market central banks have indeed raised interest rates this year, Jamaica is almost unique in the world in terms of our fiscal tightness, including in comparison to developed countries who for the most part have not yet raised their interest rates as they view the current rise in inflation as transitory. As long as the Jamaican economy remains depressed due to the COVID shock, we would suggest the Bank of Jamaica follows the developed country timetable to interest rate tightening, particularly that of the US. In addition, a true partnership approach to supporting the banking system is still needed so it can in turn continue to support both companies and individuals still badly affected by the COVID crisis.
It is worth elaborating here. A large number of the emerging countries now tightening (Brazil being a prominent example) had very generous fiscal support programmes with the result that they ran large deficits. Jamaica has kept fiscal policy tight relatively, and encouraged its private financial system to provide support instead. Jamaica also had higher debt relative to most of the countries concerned (pre-pandemic at least) and therefore needs to be cautious in raising rates to assess the fiscal cost.
The JCC also noted their strong support for the planned move by the Bank of Jamaica to minimise unnecessary and erratic movements in the exchange rate. “We have been arguing for many years that the response of businessmen to excessive exchange rate volatility, hedging their foreign exposure by increasing the foreign exchange rate at which they price their goods, often by between $5 and $7 above the current exchange rate, while entirely rational from an individual perspective (as Governor Byles himself observed at the recent Bank of Jamaica press conference) is sub-optimal from a policy perspective.”
They argue the central bank has more than sufficient reserves to smooth these predictable capital flows and done correctly would cost it neither reserves nor credibility.