BOJ interest rate folly

Bank of Jamaica (BOJ) unwarrantedly, increased the policy interest rate, they offer to deposit-taking institutions on overnight placements with BOJ by 50 basis points to 5 percent per annum, effective 20 May 2022, with a view to continuing slaying inflation that is well past its peak from September last year.
According to a release from the BOJ, “Inflation at April 2022 of 11.8 percent was higher than the outturn at March 2022 and represented the ninth consecutive month that inflation has been above the Bank’s target range of 4 to 6 percent. While inflation is forecasted to rise further over the next two months, the Bank forecasts inflation to fall in the second half of the year, consistent with consensus forecast for a fall in commodity prices.”
The above misses the critical point, with inflation improving since October last year with an average rate of 6.8 percent, just over the BOJ target range. The central bankers fooled around for a major part of 2021 in defending the excessively low interest rates when inflation was getting out of hand. They are erroneously focused on crawling inflation over a twelve month period rather than seeing what was taking place under their feet currently.
They are now making the mistake in the opposite direction when inflation is in decline and close to their 4 to 6 percent band. Available data shows the worse of the inflation was between May and October last year, then running at an average rate of nearly 15 percent per annum, since then, it has been just under six percent per annum, with little help from BOJ as the tighter monetary policy started in late September is just about now likely to start having the effect.
The recently harsh hike in interest rates is not the tool really meant to tame inflation but one more in keeping with reducing demand for US dollars.
According to the Central Bank, “The measures are expected to cause interest rates on deposits and loans to rise further, making savings in Jamaican dollars more attractive relative to foreign currency assets and borrowing in Jamaican dollars more expensive. They are also expected to reduce the demand for foreign currency, leading to a relatively more stable exchange rate.

BOJ interest cuts overnight rate.

The measures are also expected to cause demand in the economy to fall and, consequently, limit the ability of businesses to pass on price increases to consumers.”
It is difficult to be driving a vehicle backward over a long distance to get to one’s destination, accordingly, BOJ should not be setting policy based on what inflation was in the past but on what is likely in the future. Past inflation hikes are irrelevant to future rates once the rates are tamed, as the data now shows. Accordingly, BOJ recent big jump in rates is a mistake and should have been implemented early last year and over several months. The last three rate increases amount to applying drastic medicine after the ailment is well on the way to being cured.
This publication has written in the past disagreeing with the excessively low rate and how it was reducing the value of savers’ money while starving pensioners and small savers of badly needed income. There always is a need for a balance, either way, BOJ has gone too far and far too late.

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