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News : National Last Updated: Mar 2nd, 2022 - 05:00:06

False labour
By Marston Gordon
Mar 2, 2022, 04:41

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According to the Planning Institute of Jamaica (PIOJ) monthly inflation report for August 2021, “the main drivers of inflation were higher costs for food caused by weather shocks, increased prices for domestic fuel and higher rates for electricity. An increase in food price was the main contributor to this turnout and accounted for more than 70.0 per cent of inflation”. At the September 2021 meeting of the Monetary Policy Committee (MPC) it was stated that “the passage of Tropical Storms Grace and Ida in the month of August will adversely affect agricultural production and supply, resulting in increased food prices”.

The policy rate (the interest rate on overnight balances in the current accounts of deposit‐taking institutions at BOJ) has been at 0.50% since August 2019 when the 12 month point-to-point inflation rate stood at 4.10% and foreign exchange rate of JA$136.14 to US$1.00.

The MPC press release of February 18, 2022 stated “In the wake of past monetary policy adjustments, while interest rates in the money markets have increased at a faster pace than Bank of Jamaica’s policy rate, banks remained relatively liquid and, for the most part, have not passed on the policy rate increases to their customers who hold deposits with them. In this context, banks have also only marginally increased loan rates”.

Since August 2019, the inflation rate has on two occasions breached the top end of the target rate (Dec 2019- 6.2% and Jun 2020- 6.3%) so why the sledge hammer was taken to hike rate by 200% from 0.5% to 1.5% given inflation of 6.1% in Aug 2021 and the PIOJ and MPC expected the spike. Had the central bank considered excluding food and energy to determine core inflation this insanity would not have begun.

It is common knowledge that supply chain disruptions resulting from the global pandemic in March 2020 would feed into inflation, however it was expected by the major central banks to be transitory; the monetary tool that they are accustomed to will clearly not tame this kind of inflation and will in fact make it worse. Rising rates will likely precipitate a housing collapse and banks will make record profit with minimal risk.

The November 2021 MPC press release speaks to a total misconception wherein it stated that “This reduction in the level of monetary accommodation will cause market-based interest rates to rise further, which will make the returns on Jamaican dollar assets more attractive relative to foreign currency assets. It will also make saving in Jamaican dollars more attractive and borrowing in Jamaican dollars more expensive. These effects are intended to temper the demand for foreign currency and hence moderate the pace of depreciation in the exchange rate; and, generally, reduce demand in the economy and with it the ability of businesses to pass on price increases to consumers”.

The main drivers of inflation in Jamaica now are food price, domestic fuel and electricity, not excessive consumption or wage price increases. And the central component here is the price of energy (oil prices).
Brent crude in August 2019 was US $59.04 per barrel and at January 2022 stood at US $83.22 (a 40.95% increase). While we stood focused on FX rates and the net international reserve (NIR) in weeks of goods import and boasted that we have exceeded international benchmark on the latter, we did nothing to control what we could, that is, hedging against adverse movement in crude oil prices. The government cancelled the insurance but the public is still paying the premium (special consumption tax of $14.00 per litre) and paying at the pumps. As at March 2, 2022 the price of Brent crude is hovering over US $110 a barrel and we continue to do nothing. Yah man!


Sources: Bank of Jamaica, Planning Institute of Jamaica, Statistical Institute of Jamaica

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