BOJ must slash the ON rate to 5% now

Bank of Jamaica must make a bold move and cut the Overnight rate they charge banks to 5 percent from 7 percent now and prevent driving the economy into recession, with inflation now within the Bank’s target range and set to fall lower over the next few months.
The cut in rates now is also essential to help pension funds and the fall in the value of many of the interest sensitive assets with the financial market that fell had to be marked down to market, with higher interest rates and impaired capital in some of the country’s banks.
Many observers may credit BOJ with managing the inflation in Jamaica well and bringing it back to their target 4-6 percent range. The problem is that the country is now faced with severely undershooting the lower end of the target, a target this publication thinks should be revised down to 2.5 to 4 percent.
In March, ICInsdier.com published an article captioned “Time come for BOJ to cut interest rates”.
We posited that “Interest rates in Jamaica and around the world were pushed up since 2021 to curb inflation that got out of hand, in the process Bank of Jamaica hiked their overnight rate from 0.50 percent August 2021 to a high of 7 percent in November last year, since then point to point inflation peaked in April last year at 11.8 percent, but has since declined sharply by 34 percent to February this year, with the pace since November last year running at 44 percent below the 2021 period.
The average monthly inflation rate has dropped from the 2022 level of 0.6 percent per month from November 2021 to October 2022. It is now running at an average of 0.2 percent per month or 2.4 percent per annum over the last five months, well below the Bank’s target of 4-6 percent per annum. If history is anything to go by, the next three months should see relatively low inflation, suggesting that the current average of 0.2 per month could continue for a few more months. The fall has been consistent, although the rate for a few months exceeded this pace.”
Bank of Jamaica’s target of 4-6 percent is close at hand based on the point to point inflation, with the danger now that the rate could fall well below the lower end of the band if BOJ does not act soon to lower interest rates.
Since then, inflation has remained very low, as we forecasted, with the All-Jamaica Consumer Price Index (CPI) increasing by a mere 0.1 per cent for March 2023.
The big problem is that BOJ MPC members are constantly looking backwards at the point to point inflation and not correctly reading the more critical signals in the data they sent that inflation was killed from 2022.