Bank of Jamaica bullish in face of challenges

 

Governor of the Bank of Jamaica Richard Byles has presented a positive outlook on the fiscal year coming.

For fiscal 2024/25, the Bank projects that real economic activity will be in the range of -1.5 to -0.5 per cent. The Bank projects that real GDP for FY2025/26 is projected to grow in the range of 1.0 to 3.0 per cent. The projection for FY2025/26 largely reflects the anticipated recovery from the impact of Hurricane Beryl on the economy.

Growth is underpinned by expansions for Agriculture, Forestry & Fishing, Electricity & Water Supply and Hotels and Restaurants. The domestic banking system remains sound, with adequate capital and liquidity. 6. The domestic fiscal policy stance continues to pose no risk to inflation over the near term.

The Monetary Policy Committee (MPC) on which the Bank sits reaffirmed its commitment to maintaining low and stable inflation and will deploy the necessary tools to preserve stability. The Committee agreed that it would be prepared to adjust the stance of monetary policy if the above-noted risks crystallise and result in an upward deviation from the inflation target.

At its meetings on 18 and 19 February 2025, the MPC deliberated on its monetary policy stance in the context of increased uncertainty relating to the economic policies of Jamaica's main trading partner, and against the background of a review of the latest domestic macroeconomic data. In this regard, the MPC noted the following:

1.Recent trends and the outlook for key domestic macroeconomic indicators remain positive. Domestic inflation is projected to remain within Bank of Jamaica’s (BOJ’s) target range of 4.0 to 6.0 per cent over the next eight quarters. The exchange rate has been fairly stable and the private sector’s expectations of future inflation (inflation expectations), a key driver of headline inflation, have stabilised.

Employment levels remain high and anecdotal data suggest that wage pressures are moderating. Real gross domestic product (GDP) activity is projected to recover in 2025, following a decline in the September 2024 quarter and an estimated contraction for the December 2024 quarter, as announced by the Planning Institute of Jamaica. The current account of Jamaica’s balance of payments is projected to remain in surplus over the near term, and the international reserves are healthy and are projected to improve further. At a global level, the United States (US) Federal Reserve (Fed) has paused its monetary loosening and US long-term external bond yields are rising.

2. The Statistical Institute of Jamaica, on 17 February 2025, reported that annual headline inflation at January 2025 was 4.7 per cent, representing a general trend reduction from 7.4 per cent at January 2024. The deceleration primarily reflected the impact of lower inflation for regulated items (such as bus and taxi fares) and a general lowering and stabilisation of inflation expectations. Core inflation (which excludes the prices of agricultural food products and fuel from the consumer price index (CPI)) was 4.0 per cent at January 2025, remaining consistently below 6.0 per cent since July 2023.

3. Over the next two years, inflation is projected to remain well-anchored within the Bank’s target range. However, the risks to the inflation forecast are skewed to the upside (which means that inflation could be higher than projected). Uncertainty related to potential economic policy changes in the US could have adverse implications for inflows through the current account of Jamaica’s balance of payments, as well as inflation expectations. Worse-than-anticipated weather conditions in Jamaica could also put upward pressure on inflation. On the downside, lower inflation could result from weaker-than-projected demand.

4. Considering the domestic and global economic dynamics, the MPC at its meetings on 18 and 19 February 2025 determined that the current policy rate continues to be appropriate to support inflation remaining within the target range and maintain relative stability in the foreign exchange market. The Committee, therefore, unanimously agreed to: (i) hold the policy rate at 6.00 per cent per annum; and (ii) preserve relative stability in the foreign exchange market.

The following considerations also informed the MPC’s decisions: 1. Imported inflation moderated in the December 2024 quarter relative to the December 2023 quarter. The average price of grains (including wheat, corn and soybeans) for the quarter was lower by approximately 15.1 per cent, compared to the December 2023 quarter.

Inflation in the US decelerated to 2.9 per cent in December 2024 from 3.4 per cent a year earlier. Oil prices also declined in the December 2024 quarter, relative to the previous year and are projected to increase marginally over the next two years. On the other hand, shipping prices increased for the review quarter relative to the previous year. Over the near term, average grains and oil prices are forecast to fall by 5.9 per cent and 0.5 per cent per year, respectively.

As anticipated, the US Fed maintained its policy rate in January 2025 at the range of 4.25 per cent to 4.50 per cent. The MPC, however, noted that yields on longer-term Treasury Bills in the secondary market had risen on average from 3.7 per cent to 4.4 per cent between September and December 2024.

For the remainder of 2025, the Fed is expected to reduce interest rates by 100 basis points, thus guiding interest rates towards their long-run neutral level. 3. In BOJ’s December 2024 survey of businesses’ inflation expectations, respondents lowered their expectations for inflation 12-months ahead to 7.2 per cent from 8.3 per cent in the prior survey, representing a continuation of a downward trend since the middle of 2022.

Expectations about exchange rate depreciation have remained relatively stable. The dollarisation ratio for deposits in commercial banks, a measure of the public’s view about exchange rate risk, continues to be stable.

Information Source: Bank of Jamaica.