EPOC backs BOJ policy decisions
CO-CHAIRMAN of the Economic Programme Oversight Committee (EPOC) Keith Duncan has expressed confidence in the Bank of Jamaica’s (BOJ’S) policy decisions on inflation and the foreign exchange rate as it aims to ensure macroeconomic stability.
“EPOC is at one with the Bank of Jamaica in their proactive stance in executing their mandate of price stability, which is critical to macroeconomic stability in the medium to long term,” he said in a virtual press briefing held last Wednesday, July 20.
“EPOC also recognises that the Bank of Jamaica is well placed with the best data and its economic model to walk this tight rope and we continue to be confident that the bank will do what is in the best interest of Jamaica,” he added.
Since October last year, the central bank has increased overnight lending rates by some 500 basis points as it seeks to rein in inflation to its targeted rate between four per cent and six per cent. It’s latest attempt came at the end of June when it increased the interest rate by 50 basis points to 5.50 per cent.
While acknowledging that the increase in interest rates will “hurt the private sector”, Duncan pointed out that there needs to be a broader appreciation of the BOJ’S role.
“When we take the overall picture, that price stability is the ultimate objective and inflation affects the most vulnerable in our society, the Bank of Jamaica must take a balanced view of all the factors and do what it thinks is in the best interest of Jamaica and maintain price stability, which underlines macroeconomic stability,” he said.
Still, the price of goods have continued to increase at an accelerated rate, coming in at 10.9 per cent in June. While this rate is still above the BOJ’S targeted range, it is still some way from the worst-case scenario projection between 12 per cent and 15 per cent. According to the central bank, inflation will fall between eight per cent and nine per cent over the next two years.
However, according to the BOJ’S latest Inflationary Expectation Report — a survey of the private sector’s projection of inflation in the near term — businesses believe that inflation could reach 12.8 per cent.
“A key indicator that the Bank of Jamaica looks at is the survey of business expectations and at the end of May that came it at 12.8 per cent. And if businesses are expecting inflation to come in at 12.8 per cent, we need to reduce those inflationary expectations. Now, how does that work?” Duncan questioned.
“The Bank of Jamaica in tightening monetary policy looks at the critical factors driving businesses’ inflationary expectations. And what is driving that for businesses, as noted in the Inflationary Expectation Report, is the change in the external price of goods,” he added.
In this regard, the EPOC co-chairman noted that inflation and inflationary expectations were determined by risks associated with the war in Ukraine, inflation in the economy of Jamaica’s trading partners and disruptions in the global supply chain — all of which contribute to the rise in price of commodities globally.
“...Those are the main drivers because commodity prices are driving the imported inflation in Jamaica,” Duncan explained.
Since the BOJ has no control over the price of international commodities, Duncan said its next move to mitigate the impact of imported inflation was to target stabilising the foreign exchange rate. As at June, the exchange rate for the US dollar was $151.60, reflecting point-to-point inflation of two per cent. This was lower than the 6.1 per cent depreciation registered in June 2021.
In fact, the BOJ has indicated less volatility in the foreign exchange market in the April – June 2022 quarter as it reduced its intervention in that market. Whereas the bank sold US$351.9 million at the end of March to US$60 million at the end of June.
Commenting on this, Duncan noted, “To a lesser extent, we’ve seen a significant amount of stability in the [foreign] exchange rate over the past three to four months. And if the businesses expect that we will continue to get stability in the exchange rate, then their inflationary expectation will be reduced and this is what the Bank of Jamaica wants to see influencing their policy decisions.”
He acknowledged that for EPOC this was also a welcomed development.
“I believe many stakeholders would want to see a continued orderly foreign exchange market and also that the US dollar and the Jamaican dollar are trading within a stable range… I think we’re seeing a movement with the Bank of Jamaica looking to maintain stability in the exchange rate and a more orderly market. So we welcome that.”
When asked if he anticipates the central bank will continue to increase interest rates, Duncan argued that the BOJ understands the risks associated with such a move and underscored that the bank has been “proactive” to manage inflation and do what’s in the best interest of the country.