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No change to BOJ's 0.5% policy rate

Observer business writer

Friday, February 21, 2020

There will be no change to the Bank of Jamaica's (BOJ's) 0.50 per cent per annum policy rate — not at least for another month when the rate comes up for its monthly review on March 27.

The BOJ's policy rate represents the rate at which it offers to Deposit-Taking Institutions (DTI's) for overnight placements made with the bank. The BOJ sets its policy interest rate so as to ensure that the yearly rate of increase in consumer prices (ie inflation) is within the 4.0 per cent to 6.0 per cent target set by the Government.

The BOJ announced that effective yesterday the policy rate would remain at 0.50 per cent. The BOJ has reduced the policy rate from 3.25 per cent per annum at the start of 2018 to the current level at 0.50 per cent.

The decision to hold the policy rate unchanged reflects the BOJ's continued view that monetary conditions are generally appropriate to support inflation remaining within 4.0 to 6.0 per cent and a faster pace of economic growth. Loans provided to the private sector by banks are growing at a very robust pace, particularly to the productive sector.

The BOJ says alternative means of financing such as corporate bonds and equities continue to grow. As a result the BOJ says it will, therefore, continue to closely monitor the trends in credit from banks, capital market transactions, overall economic activity and most importantly, inflation to determine the future path for the policy rate.

Speaking at his quarterly news briefing yesterday, BOJ Governor, Richard Byles pointed to a number of factors influencing this monetary policy decision, as he sought to justify the bank's decision to hold the policy rate at 0.50 per cent.

He drew attention to the 20.3 per cent growth in credit by DTI's to businesses for the 12 month to December 2019, while credit provided to households increased by 16.5 per cent. ”This growth was notable faster than the expansions of 15.4 per cent and 12 per cent in credit to businesses and households respectively, which was recorded in 2018,” Byles observed.

In addition to loans from DTI's, the BOJ Governor said it was encouraging that a number of firms are obtaining financing from the issue of corporate bonds and equity.

“This buoyancy in credit growth has been reflected in the headline gross domestic product (GDP) numbers, partly because of the recent fallout in mining and agriculture. However, non-mining GDP, which abstracts from the difficulties experienced in the mining sector, is trending upwards from 1.1 per cent for the September 2018 quarter to 1.4 per cent for the September 2019 quarter,” Governor Byles explained.

This accelerations, he posited is being buoyed by marked increases in tourism and manufacturing. Additionally, he cited as an important lending indicator of economic activity, the GCT tax inflow, which he suggested showed continued economic expansion.

The BOJ Governor admitted that “economic expansion remains below the economy's capacity” and “it is largely for this reason that we believe inflation will average slightly below 5.0 per cent over the next eight quarters and why we have kept the accommodative monetary policy in place.”

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