Bank of Jamaica has taken note of an article published in The Gleaner on March 1, written by Dr Samuel Braithwaite and titled ‘BOJ Monetary Policy: Is There a Byles Effect?’
In the article, several questions were posed to BOJ, and in the context of the issues raised, the central bank wishes to provide a few points of clarification on the Jamaican economy and Bank of Jamaica’s monetary policy framework.
The bank estimates that, having recovered from the effects of COVID-19, the Jamaican economy is now operating at a level of demand for the goods and services it produces, that is above the ability to be sustained by the economy over the long term.
Generally speaking, demand-pull inflation is now an economic reality. While the behaviour of some specific groups does not fit into this general picture, this general macroeconomic perspective underscores the view that managing macroeconomic imbalances, while involving some short-term pain, is the best way of ensuring long-term growth of the economy and the prosperity of the population.
Incentivising the population as a whole to save more will have the twin effects of cooling demand-pull inflation and stabilising the foreign exchange market. To the extent that monetary tightening slows demand growth, it will also moderate the potentially inflationary impact of shortages in the labour market and the resulting upward pressure on wages.
Monetary tightening by any central bank is never painless or popular. This is what is being experienced in the United States. There is, however, a general acceptance in that society of the need for monetary tightening to address the problem. The International Monetary Fund, in its 2022 Article IV report on Jamaica published recently, endorsed BOJ’s monetary policy actions and commended Jamaica on its strong track record of building institutions and prioritising macroeconomic stability. It is these factors, together with a nimble and prudent policy response, that have helped Jamaica to successfully navigate the pandemic and other recent global shocks.
The three main international credit rating agencies also reaffirmed their positive credit ratings and stable outlook for Jamaica during 2022 in the context of the country’s continued deployment of sound and prudent fiscal and monetary policies, as well as the generally positive economic performance and outlook.
It is important to note, too, that decision-making at BOJ changed fundamentally with the passage of the Bank of Jamaica (Amendment) Act 2020, BOJA, which introduced price stability as the primary mandate of the central bank. Before BOJA 2020, monetary policy decisions were the domain solely of the governor of BOJ. Under the new legislative arrangement, such decisions are made by the Monetary Policy Committee, MPC, which is chaired by the governor.
The successful conduct of monetary policy is fundamentally dependent on the anchoring of inflation expectations. People will behave in a manner that is consistent with how they feel about future inflation. A key job for the central bank, therefore, is to provide information about what it is doing to influence inflation. BOJ has, therefore, significantly increased its communication to help manage inflation expectations.
As has been the case in the past, the central bank’s future monetary policy actions will continue to be guided by incoming data on the economy.
The question was posed: “Why then was the policy rate lowered consistently between 2017 and 2019 at a time when the Fed was increasing its policy rate?” In response, we wish to point out that the circumstances then were different to those existing now. At that time, Jamaica had low, stable inflation (driven in part by the forces of globalisation) which allowed BOJ to pursue countercyclical policy measures.
In response to the question: “Was the Jamaican dollar depreciation deliberately allowed, given the BOJ’s inflation-targeting mandate?” we wish to note that Bank of Jamaica has, and continues to, pursue the Government of Jamaica’s policy of a market-determined exchange rate. The bank’s approach to the foreign exchange, or FX, market has always been conditioned on the prevailing circumstances. Over the period referenced by Dr Braithwaite, there was general acknowledgement that the exchange rate was overvalued, indicated by large current account deficits. The policy imperative at the time was to address the sources of these imbalances, including large, unsustainable fiscal deficits and the overvalued exchange rate.
In the face of fundamental, structural imbalances in the economy, the bank’s approach to the FX market then had to be different to what it is now.
The exchange rate at present is considered fairly valued and the fundamentals are sound; however, there is an inflation shock that holds the potential to be long-lasting, and therefore, must be managed firmly with empirical research and data.
Carey-Anne Williams is division chief of the Research & Economic Programming Division, Bank of Jamaica.Email: firstname.lastname@example.org
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