The Bank of Jamaica (BOJ) on July 1 adopted the overnight deposit rate as its new signal rate instead of the rate paid on 30-day certificates of deposit, and on that occasion reduced the rate by 25 basis points to 3.75 percent. In April the BOJ cut the 30-day CD rate by 25 points to 4.75 percent.
The central bank said its outlook was reinforced by the government's commitment to maintaining a 7.0 percent budget surplus for the 2017/18 financial year, which began April 1, and to meet the overall public sector fiscal targets under the agreement with the International Monetary Fund.
"The continued tight fiscal policy posture supports a further easing in monetary conditions," the BOJ said in a statement from Aug. 24.
In its quarterly press briefing from Aug. 16, BOJ Governor Brian Wynter said the central bank would maintain a generally accommodative policy stance in light of the outlook for inflation over the next four quarters though it "remains poised to address any undesirable risks to inflation that may emerge" as it ensures the benefits of low and stable inflation expectations.
Wynter also said interest rates on bank loans in Jamaica remained too high, with lending rates adjusted for inflation around 7.5 percent, which effectively excludes many businesses from successfully approaching financial institutions for a loan.
In its latest statement, the BOJ said Jamaica's main economic indicators continue to improve, with economic activity expanding although at a slower pace than its potential rate of growth.
Inflation has been following a generally positive trend with expectations firmly anchored in single digits, international reserves have continued to rise, the current account is projected to remain at sustainable levels, private sector credit is expanding strongly and market interest rates are trending downwards.
Jamaica's inflation rate inched up to 4.5 percent in July from 4.4 percent in June, with the BOJ on Aug. 16 saying the persistently low level of core inflation was reflecting lower exchange rate pass-through to domestic prices coupled with continued fiscal restraint.
In its statement from Aug. 16, the BOJ also said inflation was forecast to end within the 4 - 6 percent target range in 2017/18, with risks seen balanced, due to improved demand, a tempered rise in crude oil prices and administered price changes in connection with tax measures.
After shrinking in 2014, Jamaica's economy has slowly been improving and grew for the 10th consecutive quarter in the second quarter due to improving macroeconomic fundamentals through structural reforms along with higher foreign and domestic investor confidence.
In the first quarter of this year Jamaica's Gross Domestic Product grew by an annual rate of 0.1 percent, down from 1.4 percent in the previous quarter, with the BOJ forecasting growth in 2017/18 of 1.5 to 2.5 percent.
The country's growth prospects are also seen improving based on improved external competitiveness due to structural reforms as part of the IMF agreement, which is also helping strengthen the credibility of its reform agenda.
In November 2016 the IMF approved a 3-year, US$1.64 billion stand-by agreement with Jamaica to support the government's economic reforms, with about $412 million made immediately available and the rest to be distributed in six tranches following reviews.
The financial aid was aimed at providing insurance to Jamaica against adverse external shocks during the period of reform, which includes a move to inflation targeting by the BOJ along with a strengthening of its autonomy, refining the policy signaling, the liquidity provision framework and macroeconomic forecasting.
The IMF also said the BOJ was committed to maintaining exchange rate flexibility and building international reserves through market-based purchases.
After depreciating steadily from 2010, the Jamaican dollar has been relatively stable since November last year and was trading at 127.5 to the U.S. dollar, up 0.7 percent this year.
The Bank of Jamaica issued the following statement:
"Bank of Jamaica announces that, with effect from 25 August
2017, the rate offered on overnight placements with the Bank, the policy
interest rate, will be reduced to 3.50 per cent from 3.75 per cent.
The adjustment to the policy rate reflects the Bank’s assessment
that inflation will be within BOJ’s inflation target of 4.0 per cent to 6.0 per
cent for fiscal year 2017/18. This outlook has been reinforced by the
Government’s demonstrated commitment to maintaining a 7.0 per cent primary
surplus for FY2017/18 and to meet the overall public sector fiscal targets
under the precautionary Stand-By Arrangement. The continued tight fiscal policy
posture supports a further easing in monetary conditions. Jamaica’s main
economic indicators continue to improve in the context of a strong reform
programme and a favourable external environment. Economic activity continues to
expand although at a slower pace than its potential rate of growth. Other key
macroeconomic indicators have been reflecting generally positive trends:
inflation expectations remain firmly anchored in single digits, international
reserves continue to rise, the current account of the balance of payments is
projected to remain at a sustainable level, private sector credit is expanding
strongly and market interest rates have been trending downwards."
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