Government must shake up BOJ

Inflation has moderated substantially since the sharp spike in 2021 and the Bank of Jamaica has some role in it, with tighter monetary policy, but the price may be much greater than may be visible currently. A look at BOJ reports on inflation since 2021 is very worrying, when compared with the actual outcome, suggesting that the MPC that is guiding the BOJ has done a terrible job in its forecasts. This is a matter the Minister of Finance must carefully look at and so correct what is clearly a major area of concern in managing a very critical part of the country’s economy.
The job of fighting high inflation may be substantially done for this round, how efficiently was it executed is another matter that the country needs to have answered. A careful look at reports emanating from the Bank of Jamaica tells a tale of what looks more like guesswork, than scholarly assessment. Don’t take our word for it, compare BOJ’s utterances since 2021 and their outturn.
Up to April 2021, BOJ fiddled around telling the country that inflation was well under control and that it would remain within the band of 4-6 percent for two years, that’s before they quickly found out that it was not going to be so. Even then rather than acting promptly, they waited until August to announce an increase in the overnight rate, although admittedly they started to pull money out of the market earlier by way of certificate of deposits.
Something must be terribly wrong that within a month of assuring the Minister of Finance that all will be well they had a change of mind. The same thing seems to be happening currently, with inflation set to be within, or very close to the 4-6 percent range in April well ahead of the forecast made by the BOJ at their March meeting when they stated that the target would not be reached until the fourth quarter this year.
The Governor of the Central Bank informed the Ministry of Finance in April 2021, that they could not increase interest rates as that would trim economic growth. But by May 2021, they were singing a different song of higher inflation and forecast for increased rates.
In May, last year they made an erroneous statement that inflation was still moving higher and would increase over the next two months, in fact the underlying data was suggesting that it was improving. Importantly, at their last meeting at which they reviewed the state of inflation they felt so comfortable that things were in line with their forecast that the next meeting was set for May. Had they looked at the real message that had been screaming at them for 2022 and more so since November they would have taken action to reduce overnight interest rates from then.
The MPC release stated, “Annual inflation is projected to continue to fall to the Bank’s inflation target range of 4.0 to 6.0 per cent by the December 2023 quarter. One-off regulated price adjustments may, however, result in a temporary uptick in inflation.”
“Notwithstanding these positive developments, the MPC noted that the risks to the inflation outlook remain elevated. In a context where the domestic economy continues to grow, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation. Higher inflation could also result from a worsening in supply chain conditions and higher commodity prices if there are further geo-political disruptions. Among the factors that could lead to lower-than-projected inflation, weaker-than-expected global growth could negatively affect domestic demand, and some projected adjustments to regulated prices may not materialise.”
Therefore, to continue underpinning inflation returning to the target range and to underwrite continued stability in the foreign exchange market, the MPC unanimously agreed to hold the policy interest rate at 7 percent, to maintain tight Jamaican dollar liquidity in the money market and to continue fostering relative stability in the foreign exchange market. The Bank’s liquidity management strategy incorporates the impact of the one percentage point increase in the domestic and the foreign currency Cash Reserve Requirements applicable to DTIs, effective 01 April 2023.”