Inflation trumps devaluation

No truth that BOJ is trying to devalue the Jamaican dollar — Wynter

Business editor

Friday, August 31, 2018

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Bank of Jamaica (BOJ) Governor Brian Wynter continues to push for the Jamaican public to join the bank in concentrating on the achievement of low inflation targets rather than the appreciation or depreciation of the Jamaican dollar against its US counterpart.

“The important thing is inflation, not the exchange rate,” Wynter said.

Pointing to several improvements in the economy, including job creation, gross domestic product (GDP) growth between 1.0 and 2.0 per cent, healthy international reseverves, and low market interest rates, Wynter said the bank “is able to continue with an accomodative policy stance in support of expanded output and job creation which will return inflation to the bank's target of 4.0 to 6.0 per cent“.

He was speaking to members of the media at the Quarterly Monetary Policy Report (QMPR) press conference at the central bank in downtown Kingston on Wednesday.

Recently there has been some public concern and commentary about the Jamaican dollar falling in value against the US dollar — at a time when the US dollar was strengthening against almost all world currencies — and the idea that the bank was somehow trying to manipulate the exchange rate downwards in an effort to increase inflation.

This has even been a topic for a recent Clovis cartoon in the Jamaica Observer on Wednesday which depicted the governor trying to assure the press that the central bank was not involved in exchange rate manipulation, only on lowering interest rate; while a crippled Jamaican dollar lay flat on its back, struggling to get back on its feet.

But Wynter was at pains to tackle that narrative head-on.

“Let me be very clear: there is absolutely no truth to this narrative,” Wynter asserted. “It would be to do the exact opposite of the explicitly stated objectives of the B-FXITT mechanism introduced in July 2018, and would violate the well-established committment of the Government to a flexible market-determined exchange rate.”

“We have not been doing that, we are not doing that and we will not do that,” Wynter said.

He noted that he expects increased economic activity to drive inflation to the desired target, while reiterating that the central bank does not defend a particular exchange rate. Rather, Wynter said, the BOJ “seeks instead to ensure the orderly functioning of the foreign excahnge market”.

“In accordance with the rules of B-FXITT, Bank of Jamaica sold US$65 million over the last two weeks. In addition, the bank has committed to sell a further US$46.5 million over four weeks,” the governor disclosed, adding that US$16.5 million was in that day's B-FXITT sales operation.

“Also, the bank has opened an offering to the market of a US dollar-indexed note as an alternative investment option for investors. These actions included a flash sales operation of Friday last week that was aimed at averting disorderly market conditions that the bank judged to be imminent,” Wynter said.

He argued, too, that the BOJ's activities have restored confidence in the market, and that there is a lot more transparency in the foreign exchange market since the advent of the new B-FXITT auction system. And while the Jamaican dollar may have declined by three cents against the US dollar earlier in the week, the governor indicated that it had actually appreciated by some 50 cents the previous week — to little public notice.

Meanwhile, with inflation actually below target at just 2.8 per cent in June, the BOJ is aiming to return inflation to between 4.0 and 6.0 per cent for the March 2019 target.

“Pleae note, however, that Bank of Jamaica will closely monitor those credit conditions and will make further cuts to the policy rate if required,” Wynter said.

In relation to the lower-than-expected inflation out-turn in June, the governor revealed that this was primarily due to the impact of “stronger-than-anticipated declines in food prices since the start of 2018”, which signalled a recovery in agricultural output after disruptions late last year.

“The lower inflation is also due to lower-than-forecasted imported inflation and a reduction in the pass-through of oil prices to inflation,” he added. “Over the near term, the inflation forecast is mainly predicated on an expected increase in domestic agricultural prices, oil prices remaining elevated, and the impact of improving economic activity supported by accomodative monetary conditions over the past year.

He noted that the level of inflation expected by businesses remains anchored at the midpoint of the Bank's target at 5.0 per cent.

However, there are some potential risks ahead which could affect that forecast, such as weather conditions being worse than anticipated, domestic demand being higher than projected, and the exchange rate depreciating faster than anticipated.

“Ultimately, low inflation is a good thing for an economy,” Wynter said, noting that 4.0 to 6.0 per cent is relatively low.

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