Bank of Jamaica maintains policy rate, core inflation is being contained and partially compliant with 37 of 40 FATF recommendations

By Caribbean News Global

KINGSTON, Jamaica – Bank of Jamaica’s Monetary Policy Committee (MPC), at its meetings on 18 and 19 December 2023, unanimously agreed to maintain: (i) the policy interest rate (the rate offered to deposit-taking institutions (DTIs) on overnight placements with Bank of Jamaica) at 7.0 percent, (ii) tight Jamaican dollar liquidity conditions, and (iii) relative stability in the foreign exchange market; meantime, at meetings on 18 and 19 December 2023, MPC noted that “trend suggests that core inflation is being contained, which bodes well for the longer-term inflation outlook.”

Minister of finance and the public service, Dr Nigel Clarke, addressed the House of Representatives on Tuesday (December 19) and announced that “Jamaica is now either fully or partially compliant with 37 of the Financial Action Task Force (FATF) 40 recommendations.

BOJ maintains the policy rate

Jamaica’s annual headline inflation rate at November 2023 of 6.3 percent was above the 5.1 percent at October 2023 but much lower than the peak rate of 11.8 percent recorded at April 2022.

Core inflation (which excludes food and fuel prices from the Consumer Price Index (CPI)) was 5.6 percent at November 2023, generally in line with the average for the past three months and lower than the 8.4 percent recorded at April 2022. This trend suggests that core inflation is being contained, which bodes well for the longer-term inflation outlook.

The key drivers of headline inflation, such as international commodity prices and shipping costs, continued to decline, and the exchange rate has remained generally stable, given the monetary policy actions as well as strong tourism and remittance inflows. Consistent with these trends, deposit dollarisation, which reflects the proportion of United States (US) dollar deposits to total deposits, continued to trend downward to its lowest level since December 2011.

With regard to commodity prices, international oil prices have trended below the bank’s forecast, mainly due to the weaker-than-forecasted impact of production cuts by major oil producers. Average grains prices were also well below the bank’s forecast and are expected to remain below projections over the near term. Inflation in the economies of Jamaica’s main trading partners has also continued to decline.

As anticipated by the bank, the uptick in headline inflation in November 2023 was primarily driven by the impact of an increase in public passenger vehicle (PPV) fares announced by the government. This is in addition to high domestic agricultural price inflation due to continued adverse weather conditions. The increase in inflation in November, consequent on these factors, marks the onset of temporary fluctuations in inflation outside the target band.

Inflation is projected to continue to rise above the bank’s target range for much of the period between the December 2023 and March 2025 quarters, primarily due to the continued impact of the increases in selected PPV fares. Without the effects of the PPV fare increase, it is estimated that annual headline inflation would have averaged 5.9 percent during this period.

In the context of the positive trends in the key drivers of headline inflation, fairly stable core inflation and the expectation that the impact of the PPV fare increase will be temporary, the MPC decided to maintain the monetary policy stance.

The risks that inflation could be higher than forecasted are elevated. These risks include second-round effects from the PPV fare increases, sharper-than-anticipated increases in domestic agricultural price inflation over the near term, and higher-than-projected future wage adjustments in the context of the tight domestic labour market. A deterioration in supply chain conditions could also influence higher inflation. The main downside risks, which could lead to lower inflation, include the possibility that oil and grains prices could trend well below the forecast. Other downside risks also include weaker-than-expected global growth, which could have a stronger-than-projected downward pull on domestic demand and imported inflation, resulting in lower levels of price changes.

Against the background of these developments, the MPC unanimously agreed to maintain: (i) the policy interest rate at 7.0 percent, (ii) tight Jamaican dollar liquidity conditions, and (iii) relative stability in the foreign exchange market.

The following considerations also informed the MPC’s decisions:

• The Jamaican economy continues to expand, which supports increases in aggregate demand for goods and services.
• The risks to the domestic GDP forecast are skewed to the downside, which means that actual GDP growth could be lower than the forecast.
• US GDP growth for 2023 is now projected to be higher than previous projections, but is still projected to slow in 2024. 

As anticipated, the Fed continued to maintain its monetary policy target for interest rates at 5.25 to 5.50 percent in December 2023, following its last increase in July 2023. The Fed also suggested that future monetary policy decisions will continue to be data-dependent. Consensus forecast is for the Fed to begin cutting rates by April 2024.

• The outturns for selected external indicators have been below the bank’s projections, for the most part;
• The risks to the outlook for the US economy are balanced;
• The MPC continues to see a relatively strong, lagged pass-through of its policy rate to interest rates in the domestic money and capital markets and the term rates offered on deposits by deposit-taking institutions (DTIs);
• The domestic banking system remains sound, with adequate capital and liquidity;
• The domestic fiscal policy stance continues to pose no risk to inflation over the near term;
• The MPC noted that future monetary policy decisions will, therefore, critically depend on incoming data related to the strength of the potential risks to inflation noted above.

The next policy decision announcement is on 20 February 2024.

Meanwhile, Jamaica’s fourth Round Mutual Evaluation, conducted in 2015 by the Caribbean Financial Action Task Force (CFATF) and published in 2017, concluded that the country was compliant or largely compliant in only 17 of the FATF’s 40 recommendations.

“Jamaica is now either fully or partially compliant with 37 of the Financial Action Task Force (FATF) 40 recommendations.”

Speaking in the House of Representatives on Tuesday (December 19), minister of finance and the public service, Dr Nigel Clarke, said this progress in the country’s Anti-Money Laundering (AML)/Counter-Terrorism Financing (CFT) legislative framework “is critically important for Jamaica and Jamaican citizens as we wage a multiple decade-long struggle with organised crime.”

Dr Clarke announced that “With the 2023 re-rating, in aggregate, Jamaica’s performance has now resulted in a total of 20 recommendations being upgraded to ‘Compliant’ or ‘Largely Compliant’ since the 2015 mutual evaluation,” adding, “ he significant progress that has been made “required the amendment of many laws and the passage of new ones in addition to the passage of many pieces of legislation, amendments, and new regulations, and this required the resolve of this Administration and this parliament.”

“It is imperative that Jamaica swiftly addresses these three remaining pieces of legislation, as the window for getting them in place is very narrow. Jamaica’s fifth Round of Mutual Evaluation is scheduled for mid-2026. However, the date for submitting its self-assessment of its legal framework against the FATF 40 Recommendations (Technical Compliance Template) is December 2025,” the finance minister announced. “We are optimistic that Jamaica will clear the final hurdle by February 2024,” said Dr Clarke.

  – With files from Jamaica Information Service (JIS)