The Bank of Jamaica (BOJ) is announcing its decision to increase the policy interest rate by 50 basis points (bps) to 6.00 per cent per annum, effective today (August 19).

The Central Bank, in a statement late yesterday, said that despite improving international volatility, stability in the exchange rate and higher interest rates, it believes “the conditions that led to these inflation outturns have not sufficiently solidified to ensure that inflation is sustainably on a downward path”.

Having peaked earlier and lower than expected in April 2022, inflation in May and June were both 10.9 per cent, followed by 10.2 per cent in July.

The BOJ also decided to continue pursuing other measures to contain Jamaican dollar liquidity expansion and to maintain relative stability in the foreign exchange market. The Central Bank said it will continue to closely monitor the global and domestic economic environment and is prepared to pause its monetary policy tightening if the incoming data continues to reflect a downward track for inflation.

Per the BOJ, the current decision has resulted in a cumulative increase in the policy rate of 550 basis points since October 2021, which has taken the policy rate to a level that the Monetary Policy Committee (MPC) tentatively considers to be appropriate.

“Since October 2021 to date, the bank, while maintaining a flexible exchange rate, has taken strong actions in the foreign exchange market including an adjustment to the Net Open Position limits for deposit-taking institutions (DTIs) and the sale of foreign exchange to the market, when necessary. These policy actions have contributed to the maintenance of stability in the foreign exchange market and, without them, imported inflation and hence the final prices faced by consumers would have been higher. The bank’s gross reserves have remained comfortably above the level considered adequate, which reinforces its ability to support the foreign exchange market as needed,” the bank indicated.

“The measures are expected to cause interest rates on deposits and loans to rise further, making savings in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive. They are also expected to reduce the demand for foreign currency, leading to a relatively more stable exchange rate. The measures are also intended to constrain aggregate demand in the economy and, consequently, limit the ability of businesses to pass on price increases to consumers. Some DTIs have commenced adjusting interest rates on deposits and loans,” the statement continued.

Inflation is projected to generally stabilise over the remainder of the year, consistent with the consensus forecast for a fall in commodity prices and the bank’s overall monetary policy stance.

This means that, absent any new shocks, the public should see annual inflation rates each month between nine per cent and 11 per cent for the remainder of 2022.

Inflation is also projected to fall to single digits in early 2023 and to enter the BOJ’s target range by the end of 2023, as long as the conflict between Russia and Ukraine does not escalate and inflation among Jamaica’s trading partners continues to fall.

A summary of the discussions influencing the monetary policy decision by the MPC has been published on the bank’s website, with factors influencing this monetary policy decision to be discussed at the bank’s monetary policy press briefing, scheduled for Friday, August 19, at 10:00 am.

The date of the next policy decision announcement is September 29, 2022.