However, local currency deposits growing faster month-over-month

Durrant Pate/ Contributor

There has been a sharp contraction in the flow of new loans to the private sector since the start of the  year to May 2023.

Bank of Jamaica (BOJ) Governor, Richard Byles, who made the disclosure at the Central Bank’s quarterly news briefing today reported that the decline has been “appreciably in real terms by 6.2 per cent and generally reflects the impact of higher interest rates and tightened credit terms in the banking system. Also, notable, local currency deposits grew by 14.4 per cent May 2023, which was faster than the 10.8 per cent growth at April 2023.” 

This increase was above the estimated growth in nominal gross domestic product (GDP) for the June 2023 quarter and reflects an increasing propensity by Jamaicans to save in the context of attractive, real interest rates. 

Regarding the stability in the foreign exchange (FX) market, Byles asserted, “the maintenance of tight liquidity in the financial system by offering securities to the market at attractive rates, thereby reducing the quantum of Jamaican dollars available to the banking system, combined with the occasional intervention of the bank in the foreign exchange market, has led to relative stability in the exchange rate.” 

Deposit dollarisation continues to trend downward 

This in turn, has significantly limited the pass-through of imported inflation to domestic prices. He advised that a positive by-product of managing inflation is that, in the context of the stability in the foreign exchange market, deposit dollarisation has continued to trend downward from the highs achieved during the pandemic. 

At June 2023 the deposit dollarisation ratio for Deposit Taking Institutions (DTIs), which is the share of the total deposits in the banking system that is held in foreign currencies, was 40.9 per cent. This is significantly lower than 43.9 per cent that was recorded at the start of 2022 and lower than pre-pandemic ratios. 

The BOJ Governor assesses that these results, “represents growth of confidence in holding Jamaica dollar deposits based on real interest rates and the knowledge that foreign exchange is easily available from the market when needed.”

FX market remains stable 

The foreign exchange market, Byles argues has remained relatively stable within a narrow band over the past two years reflecting, in part, the actions taken by the BOJ. To prevent undue volatility in the foreign exchange market, the BOJ sold approximately US$585 million via its B-FXITT facility for the 2023 calendar year to date. 

When these sales are set against BOJ purchases, however, the result is that the Central Bank net purchased approximately US$761 million over the period. “In this context, as at August 16, 2023, Jamaica’s gross international reserves remained substantial at approximately US$4.6 billion, which exceeded the standard measure of adequacy by approximately 15.0 per cent. The bank projects that the gross reserves will continue to remain adequate in the medium-term,” Byles told the media briefing. 

One of the outcomes of the BOJ’s management of the FX market is that it has served to anchor inflation expectations. In the bank’s latest survey of inflation expectations, less than 14.0 per cent of the respondents indicated that strong depreciation in the exchange rate was the most important factor behind their view of future inflation. 

The most frequently cited factor was changes in the prices of imported commodities such as grains and oil. The last time the exchange rate was the dominant reason, was February 2021, at which time 41 per cent of the businesses surveyed reported the exchange rate as the most important factor guiding their inflation expectations.