BOJ’s several missed inflation forecasts

Bank of Jamaica has done an awful job of telling the truth about inflation in Jamaica since early 2021 and the bank’s management of the tools to combat it. The impression given is that inflation continues to run at nearly ten percent per annum for most of this year, but that is false. According to data released by Statin since January, inflation is running at just under 6.5 percent per annum, not the ten percent the bank is consistently mentioning in its reports and recently reduced to 9.3 percent.

BOJ interest cuts overnight rate.

It is not that interest rates should not have been increased, the question is the extent of it and how long it may go on. It also means that they have been applying the incorrect dosage of interest rates medicine to inflation that has subsided since the start of the year. The reality is that the terribly high inflation rate was up to September last year, not in 2022, although they were some high months this year but not as high as the comparative periods last year.
Come December or January, the country will be told that inflation has suddenly plummeted to the 6 percent level because the bad periods for 2021 are no longer in the data set. The decline will have had little to do with Bank of Jamaica’s interest rate hike, but as sure as night follows day, the central bank will be praised for its action in bringing the inflation rate sharply down. That of course will be far from the truth.
The reality is that just about every public forecast by the country’s central bank since the beginning of last year proved to be wrong. It started with a letter written to the Minister of Finance in March last year in defending the maintenance of the 4-6 percent target for three years. In May of that year BOJ stated that 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 the consensus forecast for a fall in commodity prices. Immediately after that statement, the inflation rate declined in the following two months.
The classic case of getting wrong is BOJ’s letter to the Minister of Finance in 2021. 
“I am recommending that the target for the 12 months point to point in the spread as measured by the percentage change in consumer price index remains at 4 percent to 6 percent for the next three fiscal year,” this is an extract from a letter written to the Minister of Finance by Richard Byles head of the Monetary Policy Committee (MPC ) of Bank of Jamaica dated March 29th 2021, the letter went on to state “the targeted lower rate of inflation is not advisable as achieving this lower rate will require tighter monetary policy which will restrain the anticipated recovery in the Jamaican economy and impair the government’s debt reduction strategy. “
By May of 2021, the central bank changed its position, informing the nation that tighter monetary policy would be put into effect and that the overnight rate would be raised when they meet in September, an action which has taken from 0.5 percent to 1.5 percent.
Inflation data indicates that the dark days of higher inflation started to overshadow the country from November and December of 2020 compounded by the March inflation and was well embedded from May onwards suggesting the higher rates should have commenced from then, but the focus on point to point inflation disguised the true extent of what was going on. It appears that they are set to make the same error again, this time by focusing overwhelmingly on the point to point inflation since last year rather than looking at the trends since late last year and in 2022.
Interestingly, although the central bankers raised interest rates over the period to 6.5 percent the economic growth of the country exceeded the bank’s forecast and raises questions about their original assessment that rising interest rates would have trimmed GDP growth significantly.
The issue for this publication is not whether the Bank of Jamaica should raise rates it was clear from the earliest 2019 that the bank erred in dropping rates as low as it did at the time thus removing the incentive of Jamaicans to save in local dollars and instead encouraging them to switch to U.S. dollar investments. If the Bank of Jamaica in a matter of a few months got the inflation outlook so wrong what assurance can there be that the increase rates will not over impact the economy and create mayhem within the financial system?
Jamaicans should therefore be very concerned whether the Bank of Jamaica is correctly interpreting the data that they are churning out or not and how much credibility can be afforded them in directing the country’s monetary affairs. Longer term the bank is still holding to the 4 to 6 percent target, which suggests that sooner than later rates will have to be reduced to prevent the rate from slipping under the 4 percent bottom.
They stated in their MPC release that “while headline inflation at June 2022 may be lower than expected, the Bank prefers to see evidence of a definitive fall in commodity prices, consistent with global consensus forecasts, and a reduction in core inflation before moderating the tight monetary policy stance. The Bank expects to see this in the September and December 2022 quarters and with it, a fall in inflation expectations. Of course, this depends on tensions between Russia and Ukraine not escalating.”
The MPC report goes on to say, “inflation is projected to fall within the target range by the December 2023 quarter. This is two quarters later than previously projected. Consistent with the consensus forecast for a fall in commodity prices and the Bank’s overall monetary policy stance, and absent any new shocks, annual inflation is projected to range between 9 per cent and 11 per cent for the remaining months of 2022. Inflation is projected to fall to single digits in early 2023 as long as the conflict between Russia and Ukraine does not escalate and inflation among Jamaica’s trading partners continues to fall. In addition, the Bank’s baseline forecast assumes that the public’s expectation for future inflation will fall during the second half of 2022.”
The above is not what is taking place currently.

BOJ pushes interest rate higher

Bank of Jamaica which increased the overnight rate over the past year by 550 basis points to 6 percent in August has pushed the rate to 6.5J percent in its latest decision.
According to the Central Bank, while “the key drivers of inflation and other economic indicators are trending in the right direction, conditions have not sufficiently solidified to ensure that inflation is sustainably on a downward path.”
“Bank of Jamaica is also concerned about the slow pace at which interest rates on local currency deposits and loans have responded to its policy signals. In a context where the Bank’s policy rate has increased by 500 basis points (bps) between end-September 2021 and end-July 2022, the weighted average deposit rate offered by deposit-taking institutions to the public has increased by only 37 bps.”
“ In addition, the pace of monetary tightening among Jamaica’s main trading partners has accelerated. On 21 September 2022, the Federal Reserve Board raised its interest rate target by 75 bps, 25 bps more than anticipated by the Bank. The Fed also changed its forward guidance to signal that interest rates could rise to 4.4 percent by end-2022 and to 4.6 percent by end-2023, compared to its previous median projections of 3.4 percent and 3.8 percent, respectively. This more aggressive stance could result in US dollar assets becoming more attractive relative to those denominated in Jamaican dollars, which could cause capital outflows, prompting a faster pace of exchange rate depreciation and, consequently, a derailment of the Bank’s efforts to manage inflation.”

BOJ hikes interest rate higher to 5.50%

The Bank of Jamaica hikes its overnight rate once more by 0.50 percent to 5.50 percent following the latest meeting of the Monetary Policy Committee (MPC).
The decision the bank stated was “unanimously agreed to” by MPC who “also decided to continue pursuing other measures to contain Jamaican dollar liquidity expansion and maintain relative stability in the foreign exchange market.”
The Committee noted that “while inflation at May 2022 of 10.9 percent was lower than inflation at April 2022, core inflation remained elevated and headline inflation is likely to continue to breach the Bank’s target range over the next year.”
The MPC noted that its current decision reflects a cumulative increase in the policy rate of 500 bps since October 2021, which has taken the policy rate closer to the level that the Committee considers appropriate. The bank stated that “the measures are also aimed at reducing economic demand and, consequently, the ability of businesses to pass on price increases to consumers. These decisions are also expected to continue to support a relatively more stable foreign exchange market.”

Bank of Jamaica inflation response worsened

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Inflation in Jamaica is getting better, not worse, contrary to the recent statement by the Bank of Jamaica, to the contrary in justifying a steep hike in overnight deposit interest rates by 1.5 percent to 4 percent starting on Monday.

BOJ hikes overnight rate.

Yes, the point to point inflation rate moved up to 9.7 percent, giving the impression that inflation is getting out of hand, but that number does not tell the true story. The 4 percent interest rate will help savers get a more realistic rate on their savings.
The bank really had no significant new information that they did have when rates were raised between September and December, last year. If anything, the new information indicates clearly that inflation is moderating not worsening.
What are the facts? In January and February, last year inflation was negative 1.6 and 0.1 percent respectively and jumped to 1.1 percent in March while slipping to 0.5 percent in April, for a negative year to date inflation then, of 1.1 percent. Between May and September when BOJ moved rates up by 100 basis points inflation was the worse for the year at 1.32 percent per month or annualized 16 percent that is well up from 0.48 percent per month or 5.76 percent. The high rate of inflation suggests the bank should have moved earlier to raise rates than in September.
Inflation since the first interest rate move in September, is running at 0.6 percent per month or 7.2 percent per annum just slightly above the BOJ range of 4-6 percent. The average for the last three months is running at an average of 0.47 percent or 5.64 percent annualized, well below the 16 percent per annum for the period indicated above.
Negative inflation in January 2021 was due to a steep decline in the prices of vegetables and tubers a development that was not sustainable, as such the underlying inflation was more likely positive than negative as such the 0.6 percent increase in January this year is not out of line and is better than the December rate of 0.8 percent. The question to be answered is what can justify a sharp interest rate increase to tame much more moderate inflation over the past three months compared to when the rates were initially raised in September and on two other occasions last year by much smaller amounts that that starting on Monday?

Jamaica’s interest rates holding for now

Zero inflation in December and prospects that low to negative inflation for the first four months of 2022 might have checked the move by the Bank of Jamaica to further engineer further increase in interest rates at this time.
At its latest Bank of Jamaica certificate of deposit (CD) auction, in the amount of $11 billion that was auctioned last Wednesday, January 4, the yield held, for the 30 day instrument, remaining the same as the out turn at the December 29 auction, at 4.13 percent, marginally lower than the rate in mid October.
Bids amounting to $21.53 billion were received covering 85 applications. There were 49 successful Bids with rates ranging between 4 and 4.2 percent. The highest bid was 5.5 percent for $1 million that was not successful.
Bank of Jamaica reduced the amount of CDS to $36.5 billion that is down from $46.5 billion at the peak late last year in mid-October, with the average rate at 4.17 percent.

Long term GOJ interest rates spike to 11% high

Investors garnered interest rates as high as 11 percent on long term bonds issued by the Government of Jamaica last week auctions of three long term bonds that were reopened and raised $10 billion. The average rates were more moderate, with the highest average being 8 percent.
The Government also offered $5 billion of the 10 percent bond due 2037 with a duration of 15.5 years. The auction attracted $6.759 billion that resulted in an average yield of 7.9614 percent. The lowest rate was 6.7 percent for $50 million and the highest success rate was 10 percent. The highest submitted bid was 12.999 percent. A total of 56 bids went after the bond, with 46 being successful.
The 5.675 percent bond due 2029, with a duration of 7.5 years, ended with an average yield of 6.3506 percent. The auction attracted $2.727 billion, of which $1 billion was allocated. The lowest rate was 5.575 percent for $100 million and the highest success rate was 6.94 percent. The highest submitted bid was 11 percent.  This instrument received 43 submissions, with only 18 being successful.
The 4.5 percent bond due 2025, with a duration of 3.5 years, delivered an average yield of 6.2329 percent. Bids from 51 applicants amounting to $4.779 billion chased the $4 billion on offer. Only 44 bids succeeded in getting allocated. The lowest rate was 4.5 percent for $44 million, with the highest success rate of 10.525 percent. The highest submitted bid was 11 percent covering $100 million.
The increased rates come against the background of recent moves by Jamaica’s central bank to hike rates and move towards an era of positive interest rates. Since making their intention known, the bank raised its overnight rate from 0.50 percent to 2 percent in September and November, while rates on 30 days CDs moved to 4.11 percent from 0.59 percent since the beginning of August and 2.15 percent at the September 22 Auction.

BOJ one year CDs 2.74%

Bank of Jamaica’s one-year CD offering of $4.5 billion on Thursday, October 21, ended with an average interest rate of 2.74 percent, much lower than the 4.53 percent the 30 days CD cleared at this past week.
The one year instrument attracted 107applications amounting to $15.88 billion, of which only 27 were successful. The highest bidding rate was 8.99 percent for $423 million, but the highest successful rate was 4.76 percent, resulting in 29.4 percent of the amount applied for being accepted by the Bank of Jamaica. The highest rate payable on the full amount of $140 million applied for was 4.5 percent, while the lowest rate applied for was 1.495 percent on $400 million.
The issue is likely to be regarded by the country’s central bank as highly successful. The success of the issue should result in more longer term offerings to lock up liquidity in the market on a longer term basis than the 30 days instruments that are more costly for the bank and more challenging to manage as they mature on a more frequent basis.
Jamaica is now seeing rising interest rates following the Central Bank’s decision in August to raise as a result of surging inflation. Following that decision, 30 day CD rates climbed sharply and the Bank raised its Overnight rate from 0.50 percent to 1.5 percent in September.

More interest rate increase

Bank of Jamaica focus is not on the naysayers about its recent move on interest rates that saw the central bank hike overnight policy rate by 100 basis points to 1.5 percent as the average rate on their latest Certificate of Deposit that was offered on Wednesday, October 6, cleared at 3.28 percent up from 2.59 percent at the previous auction a week before.
At the latest auction last week, the central bank received 82 bids amounting to $18.5 billion for $12.5 billion on offer. A total of 51 bids were successful up to 4.25 percent and comes after BOJ increased the overnight rate.
The total nominal outstanding amount for the 30-day CDs on the settlement date of October 8 will be $46.5 billion, up from $45.5 million the week before. Since the start of August, the central bank CDS have pulled in an additional $11.5 billion by increasing the amount in the market from $35 billion.

Bank of Jamaica hikes ON rate to1.5%

Bank of Jamaica, the central Bank of Jamaica day raise their Over Night interbank rate by one percentage to 1.5 percent. The rise follows the Bank’s announcement at the end of August that the announced the decision to consider commencing a tightening of monetary policy at the next meeting of the Bank’s Monetary Policy Committee in September and to immediately implement other measures aimed at moderating inflation expectations, including the containment of Jamaican dollar liquidity expansion.
A precursor to the policy rate increase and further tightening of the financial market, the CDs offered by the BOJ on September 29 resulted in a continuation in the rise of CD rates to 2.59 percent from 0.59 percent at the end of July.
The overnight rate was last cut to 0.50 percent in August 2019. It remained at that level up to the end of September. It ultimately dragged other rates in the system down and resulted in significant savings in interest costs for the government.
Consistent with meeting its inflation target sustainably in the medium term, the MPC agreed to continue increasing the Bank’s policy rate and by extension raising real interest rates, which are currently significantly negative and maintaining or intensifying the accompanying measures. This position is subject to inflation and other macroeconomic data evolving as projected.

BOJ paying 4 times July rates

It now costs the Bank of Jamaica nearly four times as much to manage the financial market as it did in July this year. After a long period of easy money, the country’s central bank recently announced that they were about to end the easy money policy in light of increasing inflation.
The most recent offer of CDs on Wednesday, September 22, fetched an average interest rate of 2.15 percent, with the highest rate of a successful bid being 2.99 percent and the lowest 1.75 percent. These rates are up from the previous auction, earlier in the month.
The outstanding number of CDs sits at $44 billion, up from $40 billion at the end of the month and $35 billion at the beginning of August. This week’s issue attracted 43 bids amounting to $14.77 billion for the total of $11.5 billion offer for the 30 days instrument. Only 29 submissions were successful.
On September 1st, an offer of $9 billion attracted 40 bids amounting to $14 billion. Only 18 were successful, resulting in an average rate of $1.51 percent, with the lowest bid coming in at 0.50 percent and the highest at 4.25 percent. The highest successful bid got 2 percent.
At the beginning of August, when the total amount of CDs was $35 billion, BOJ offered just $8 billion into the market and resulted in bids of $20.22 billion and resulted in an average interest rate of 0.59 percent, with the highest successful bid ending with a yield of just 0.62 percent, just higher than the banks overnight rate of 0.50 percent.
If the higher rates hold well into next year and beyond, there will be winners and losers. Banks with short term interest bearing instruments will enjoy a rise in revenues and on loans. Those with long data instruments will see capital losses unless their investment portfolio is balanced. Savers should see some increase in their interest income while borrowers will face increased interest costs. The move is likely to result in more appreciation of the Jamaican Dollar up to a certain level.