POVERTY WILL GET WORSE

BOJ gets more criticism for ‘unjustified’ interest rate hike

The Jamaica Manufacturers and Exporters Association (JMEA) yesterday slammed the central bank’s decision to raise deposit interest rates by one percentage point, calling it “misguided” and claiming that it will undermine the economy and drive the poorest Jamaicans farther into poverty.

“A move of this nature by the central bank will result in higher lending rates to consumers, including small manufacturers and exporters, affecting their ability to pay bills and keep staff employed,” the JMEA said, adding that it strongly advised the Bank of Jamaica (BOJ) to reconsider the decision.

The JMEA’s complaint comes after the Opposition’s finance spokesperson, Julian Robinson, warned last Thursday that the rate rise will raise borrowing costs for companies and consumers who are already trying to survive in a difficult economic climate.

Also on Thursday, Dr Adrian Stokes, financial economist and senior vice-president and head of insurance and wealth management at Scotia Group Jamaica, who had slammed the indication that the BOJ’s policy rate could be raised in September, maintained that the move is misguided, given Jamaica’s current economic conditions.

The rate rise from 0.5% to 1.5% went into effect last Friday, raising the benchmark policy rate to its highest level since February 2019. The BOJ has raised interest rates for the first time in 13 years. It follows 32 rate decreases since June 2009, when the rate reached 17%.

The rate has remained at 0.5% since August 2019 – a little more than two years.

In the notes accompanying the rate rise decision, the central bank mentioned rising inflation, stating that its action is “aimed at ensuring that the annual increase in consumer goods and services remains within the bank’s inflation goal of 4.0 percent to 6.0 percent.”

In August, inflation was 6.1 percent, which was higher than the BOJ’s goal.

The bank had predicted the rise in consumer prices, indicating in August that inflation may exceed the upper limit of the goal in the recently completed September quarter. It then stated that it will raise interest rates at its September meeting in order to limit price rises.

Yesterday, the JMEA stated that the country’s inflationary rises are due to global shortages, increasing shipping costs, and continued logistics problems.

“Moreover, it has been proven in the past that the depreciation of the Jamaican dollar versus other currencies is more related to foreign currency shortages and the degree of trust in the Government’s economic policies than to interest rate adjustments,” the JMEA stated.

“In this context, we welcome the move to keep enough international reserves and a steady fiscal policy. The BOJ’s strategy is academic and will fail to stabilize the currency rate or decrease the rate of inflation, according to the organization.

“Increased interest rates would debilitate our economy and further impoverish the most vulnerable members of our society,” the JMEA stated.

Robinson, in stating the People’s National Party’s opposition to the decision, argued that the main reasons that have caused the inflation rate to breach the upper limit of six per cent are cost push factors that are external to Jamaica and driven primarily by global supply chain issues.

“Increasing domestic interest rates at this time won’t influence those factors,” Robinson said, and pointed out that many businesses that rely on imports of raw materials and finished goods are already facing significant increases in freight costs. As such, increased interest rates will put further pressure on them and, ultimately, on consumers, to whom these costs will be passed.

Robinson said the Opposition recognises that there will be continued upward inflationary pressures in the short term while the global supply chain problems persist, but these should abate in the medium term.

“While the country is recovering from the devastating economic impact of COVID it is important to maintain interest rates at a level that encourages investment and business expansion, which are necessary to achieve recovery in the shortest possible time,” Robinson said.

In his response last week, Dr Stokes told the Jamaica Observer that the move by the BOJ “runs counter to the broad macroeconomic conditions in the country”.

He said while the BOJ has a single mandate to keep inflation within a four per cent to six per cent band, the interpretation of this mandate has to take into consideration the unprecedented global economic conditions and Jamaica’s fragile economy.

Stokes also argued that inflation has been rising globally due to supply constraints occasioned by COVID-19, and said, “These supply bottlenecks are expected to ease over time, starting in Q1 2022. Inflation therefore is expected to be moderate next year. The movement by the BOJ to increase interest rates will have a material and adverse impact on an economy that is still materially below its 2019 peak.”

Leave a Reply

Your email address will not be published.