Business

BOJ's Wynter tackles questions on the dollar

BY KEITH COLLISTER

Wednesday, September 05, 2018

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UnsurprIsingly, Bank of Jamaica Governor Brian Wynter's Quarterly Monetary Policy press briefing last week Wednesday was still dominated by questions about the dollar, with the governor once again denying the “false message” that the Bank of Jamaica had been trying to manipulate the exchange rate to increase inflation.

Instead, he noted that the Central Bank wanted a “freely floating” exchange rate, and advised that Jamaica had already had “a flexible market determined exchange rate” for at least the last three years.

While they were not “managing” a rate, the Bank of Jamaica had a commitment to achieve both a “liquid” market, and a “fair” price between buyers and sellers. He noted that over the last few months there had also been an appreciation of the dollar against “all the other currencies in the world”.

He advised he didn't know which countries had an absolutely free float with no intervention, but while they were not targeting a specific exchange rate, the Bank of Jamaica retained the ability to make sure “disorderly conditions” don't emerge. For example, the flash auction of US$40 million was meant to be a “surprise”, and in fact “people were surprised”.

However, he noted he also had to protect the “reserves” of the country, and was “accountable” for the use of those resources. He added that the new B-FXITT mechanism was merely a “tool”, and was not a change in exchange rate policy towards greater “flexibility”. Over time, he expected “on average” for the exchange rate to adjust in line with the difference between Jamaica's inflation and that of our trading partners.

The governor advised that one of the reasons for the depreciation in the currency was that a substantial amount of debt refinancing had increased the demand for foreign exchange (to pay down the existing US dollar corporate debt), as well as a sharp increase in foreign exchange demand due to imports of capital goods, etc widening the current account deficit.

He advised that local bank lending in dollars was however a “very small” proportion of local bank US dollar deposits, at approximately US$3.5 billion.

Wynter advised that currently there was a high demand for local Jamaican dollar assets and not much supply, as evidenced by the recent $4 billion Jamaican dollar debt auction by the Ministry of Finance being three times oversubscribed and clearing at a 3.95 per cent yield for a just under five-year note.

He admitted that the current 2 per cent policy rate would seem to local observers to be a very loose and accommodative monetary environment, as it meant real interest rates were now negative. However, the Bank of Jamaica's recent cuts in interest rates were because the “transmission mechanism” from low interest rates to faster loan growth seemed “clogged”, and he did not want to be having “exactly the same discussion in a year” about why loan growth, and therefore growth and employment, wasn't fast enough.

Wynter said he had not cut interest rates again at their last interest rate policy meeting just preceding the quarterly press conference because he believed inflation would return to target.

However, he added the decision was “right on margin”, and he would cut interest rates again if he didn't see an acceleration in loans as he was determined to remove the slack in the economy which represented a “lost opportunity for jobs and economic output”.

Addressing the recent calls for lower lending rates by a private sector organization, he suggested it was an access to finance issue that was part of the “National Financial Inclusion Strategy”, which contains a working group chaired by Development Bank of Jamaica (DBJ) Managing Director Milverton Reynolds.

He noted that in 2016 the Bank of Jamaica had changed its 100 per cent risk weighting (capital charge) to 20 per cent for DBJ guaranteed private sector loans.

Finally, addressing again their recent “surprise” intervention, the Governor advised that while he had deliberately not characterised the foreign exchange market as disorderly, “we thought the foreign exchange market was imminently becoming disorderly”.

While he initially resisted pressure from his questioners to give guidance on what he thought the correct value of the exchange rate should be, advising that, in moving to an inflation targeting regime he sought to control something much more important than the value of the dollar, namely the consumer price index (which reflected the average consumption basket of the ordinary Jamaican), at the end Wynter allowed that it looked like there had been “a degree of overshooting” of the foreign exchange rate.

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