By: Kimberly Ramkhalawan
October 14, 2022
Jamaica’s Central Bank Governor Richard Byles is expressing confidence that his country will combat inflation in the coming years. Speaking at the IDB’s Central Bank Governors from Latin America and the Caribbean meeting where they sat down to discuss how they navigated the ups and downs of monetary and financial policies in the face of current global challenges, Byles shared the BOJ has been “vigilant on monitoring capital flows, while at the same time keeping an eye on the Federal Reserve Board”. He says keeping in mind the BOJ’s rate and the difference in inflation, currently the ‘Fed’ is at about 8.2 percent inflation, while the BOJ is at 10.2 percent, marking a two percent difference, something they have set as the benchmark in maintaining this policy rate with the Fed. While he notes their reserves are adequate, he notes that this can be easily depleted with an already high level of dollarization.
As to the impacts on the rest of Jamaica’s financial sector, Governor Byles says he ensures “getting regular oversights from the Feds, run tests to make sure from a capital perspective, they remain strong and non-performing loans are well within the range that is acceptable, keeping a keen eye on both ends at the same time. And while it’s a delicate balance there is no alternative to doing that”.
He too mirrored comments made by Jamaican Finance Minister Nigel Clarke who also shared they were recovering with 4.6 percent in 2021, with an expectation of four percent in 2022. In listing the figures pre and post pandemic, Governor Byles shared Inflation side, prior stood at around 3.9 percent which was just below the 4.6 percent, however, in 2021, he noted that they began to see inflation raise in a sustained manner, and in August prompted the BOJ to give a warning that they were about to begin raising interest and policy rates.
In October it was done, beginning its three-prong approach to inflation by moving from 0.5 percent, to which he described as being very accommodative level of policy rate, as they were trying to encourage growth. Since then, he says the move represents one of 600 basis points, coming now at 6.5 percent. Doing this he says means having “to stay ahead of inflation expectations, by moving early and move fast. Raising the interest rates this much”, he says “will encourage savings and discourage spending and borrowing as well as make Jamaican dollar assets more attractive vis-à-vis against the US Dollar”.
Currently, Jamaica has a relatively open economy with a free-floating exchange rate, with the business of capital outflows being critical to it. Governor Byles describes this 6.5percent as “being a safe guard to keep capital within the country, backing this up by ‘strong open market operations’, while the bank has been the market mopping up liquidity on a regular basis with a 30-day instrument giving support to all of its policies”.
He says because the inflation is mostly a supply driven one, what remains important is the exchange rate, but notes while commodities like oil, wheat, fertilizer, prices continue to go up, if the exchange rate is also depreciates it would mean adding ‘fuel to the fire’. Therefore, the BOJ Governor says it “takes the decision seriously in trying to keep the exchange rate as stable as possible within the context of a real floating market”. Once it remains in the market strongly, any intervention needed will keep it from becoming too volatile.
Admitting that it was not their intention to raise rates that much, he notes there might be reason for another raise in the coming weeks, following the BOJ’s meetings. Governor Byles expressed it was a hard move, as in his view it works in “contradiction get growth back in the economy” and despite the public holding the view as it something negative, they have had to communicate strongly with the public and the private sector. He notes it as something “good for the country and needed to get the country back to low inflation and it’s the kind of sacrifice that the country has had to make”.
He went on to commend the Jamaican ministry of finance for being onside with their fiscal policy being supportive of what the BOJ is trying to do. The Jamaican government has ensured fiscal policy has been very tight with a fiscal surplus and with a commitment to getting debt to GDP by 60 percent by 2027 to 2028. Although they have given assistance to the poor in the country, that assistance has been temporary and targeted, having little need to interfere with market prices, with only temporary subsidies, a lot of which ended September.
Challenges faced in implementing its monetary policy, Byles admits that his monetary policy has not been that effective through the credit channel as he envisioned, with the banks not raising their lending rates by much, borrowing from the banks still remains at a fair and attractive rate, and still disposed to lending.
As to what causes the transmission system to not be as strong as he would like, Governor Byles cites dollarization, as Jamaica has an economy that is described as fairly dollarized, with over 43 percent of deposits in dollars and policy rates have no effect on the deposits and the lending. Having limited competition when it comes to the deposits, while there may be some dominant banks, the rest are deemed small to have an impact on competitive deposits, with the bigger banks controlling the deposit rates as well as lending rates.
Recent crises are consequent on the Fed raising their rates, which has been traumatic for much of Jamaica’s financial institutions that hold sovereign bonds, having to go through a rough period in the third fiscal quarter of this year. But with bond prices returned, and trading stronger now, he attributes this to them avoiding any major crisis with strong capitalization to remain in a strong position.
Meanwhile, he says going forward, the BOJ will be keeping a close eye on the Federal Reserve Board, ensuring there is a spread between the Fed and the BOJ’s policy rate to make sure there are no capital outflows or any significance occurs. He says they are sure to be mindful of the announcements they anticipate coming as the year winds up to make sure they on par.
He hopes with this Jamaica will remain closer to the nine percent mark in inflation or 10.2 percent, with single digits anticipated in the first quarter of next year and a return to 46 percent by Q4 next year.