The Minister of Finance and the Public Service, Dr. the Honourable Nigel Clarke today released official correspondence from the Governor of the Bank of Jamaica of Jamaica on the missed inflation target to June 2018.
In September last year the Government of Jamaica set an inflation target for 12-month CPI inflation for FY 2018/19 at 5.0 per cent with an allowable deviation of plus or minus 1.0 per cent. This target of 4.0-6.0 per cent is to apply continuously over the medium term, subject to periodic review. An inflation rate of 5.0 per cent reflected, at the time that it was set, Bank of Jamaica's forecast for inflation over the medium term and was also consistent with the Government's fiscal, monetary, balance of payments and growth objectives that are enumerated in more detail in the Fiscal Policy Paper for 2017/18 (tabled in Parliament on February 9, 2017).
For April, May and June 2018, the 12-month CPI inflation outturn was 3.2%, 3.1% and 2.8% respectively, lower than the target, and under the existing accountability framework the BOJ Governor is required to account to the Minister of Finance for the deviation along with an analysis showing how the target will be met in subsequent periods.
The Minister of Finance in an article in a Sunday newspaper committed to making the correspondence public, inclusive of his response. The Minister stated, "This unprecedented step is being taken in the interest of transparency and in order to add to public understanding. Markets operate efficiently when relevant information is available and it is my view that this information on the Central Bank's thinking on inflation is important for market efficiency and I'm therefore making it public." The Minister added, "By doing so, we are also bringing forward some of the gains to be made under our planned BOJ modernization reforms to today and not waiting on the passing of the legislation to adopt a higher standard of transparency".
In his correspondence, the Governor advised the Minister that the lower outturn for inflation at April, May and June 2018 relative to the target primarily reflected the impact of a stronger-thananticipated reduction in agricultural prices in the March 2018 quarter, lower-than-forecasted imported inflation and a reduction in the pass-through of oil prices to inflation. He also conveyed that domestic demand conditions were assessed by Bank of Jamaica to be weaker than the Bank had originally anticipated.
Looking ahead, he indicated the Bank's view that agricultural prices will revert to normal levels (ie, rise), oil prices will remain elevated and domestic GDP growth will increase, the latter driven in part by the lower interest rates and more accommodative monetary conditions induced by the central bank over the past year. These elements normally show up in inflation with a lag. Because of this, the Bank is forecasting that inflation in the September 2018 and December 2018 quarters will remain close to 3.5 per cent but will rise to the midpoint of the target, ie, 5.0 per cent, by June 2019 and remain broadly at that level over the medium term. Although this is the Bank's central forecast, the Governor expressed the view that monetary policy might still not be sufficiently accommodative and further accommodation may be necessary in the near term to generate the pace of private sector credit expansion that will drive greater growth and job creation while keeping inflation within the target set by the Government.
The Minister in his response to the Governor noted the explanations that were provided and accepted that these were consistent with the data on the economy. He urged the Bank to carefully balance the risk of overshooting the inflation target in future periods by overreacting to the underperformance in April, May and June 2018, against the risk of continuing to miss the inflation target on the downside by failing to fully exploit the space for monetary policy action in view of the imperative for growth.
The Minister also affirmed the inflation target of 4.0 to 6.0 per cent in order to give the central bank the space to maintain the accommodative policies as may be needed in order to maximise growth and job creation without exceeding the target for inflation.
For further information contact:
Communication & Public Relations Branch
Ministry of Finance and the Public Service
30 National Heroes Circle
Tel: (876) 932-4656/4660/4655
Contact: Elaine Oxamendi Vicet
The following documents are attached:
1. Letter from BOJ Governor dated 7 August 2018
2. Letter from BOJ Governor dated 21 August 2018
3. Report to Minister of Finance on Breach of inflation Target and Consultation on Breach
of MPCC Target at June 2018
4. Appendix: The Pass-Through of Bank of Jamaica's Policy Interest Rate to Market
5. Letter from Minister of Finance and the Public Service dated August 21, 2018