Keith Collister, Contributor
LATIBAUDIERE
CENTRAL BANK Governor Derek Latibaudiere, at his quarterly monetary policy press conference on Wednesday, 10th August 2005, confirmed what many local analysts had already projected - namely that "there was absolutely no chance of meeting the single digit inflation target" for this fiscal year. He further advised that his revised projection for inflation for the fiscal year 2005/6 of 13-15 per cent did not include the projected rise in bus fares.
Headline inflation of 5.7 per cent for the second (June) quarter of 2005 was higher than expected largely due to greater than anticipated increases in the prices of domestic agricultural products and international oil prices. In addition, the tax measures that were implemented in April/May added significantly to inflation during the quarter. Analysed on a monthly basis, inflation was 1.9 per cent in April, spiked to 2.2 per cent in May and moderated to 1.5 per cent in June.
CORE INFLATION STILL CONTAINED
The effects of the hurricane and drought continued to have a negative impact on the supply of agricultural products. In fact, the production of some of the major agricultural commodities suffered declines ranging from 11.8 per cent to 46.5 per cent in the June quarter leading to a significant rise in prices, particularly in the starchy foods and fruits and vegetables category.
In spite of the sharp increase in headline inflation, the movement in core inflation of 1.7 per cent for the June quarter (or slightly above half a per cent per month) was relatively encouraging, although slightly higher than the 1.1 per cent estimated for the March quarter.
INFLATION STILL EXPECTED TO MODERATE
The Central Bank expects inflation to moderate in the September quarter, although at a slower pace than they originally anticipated due to continued inflationary pressures from agricultural commodities (still in short supply due to the recent adverse weather conditions), and the continued upward trend in international oil prices. The Bank is also expecting some lagged impulses from the recent increase in GCT and SCT. The Bank is, however, forecasting a lower rate of inflation during the second half of the year.
CONTINUED FOREIGN EXCHANGE STABILITY
The stability of the foreign exchange market was reflected in a marginal depreciation of 0.6 per cent in the weighted average selling rate of the domestic currency during the June quarter. This followed a cumulative appreciation of 0.6 per cent over the two previous quarters.
The positive influences on the markets during the quarter were stronger-than-expected net private capital inflows, the Government successfully borrowing US$300 million at the lowest interest rate - a coupon of 9 per cent - that a Jamaican bond had ever been issued in the international capital market.
The governor advised that they had intervened less in the foreign exchange market than they had anticipated, and that he does not believe that "there has been untoward pressure on the foreign exchange market over the last few weeks." He believes that to the degree that there has been a slightly elevated level of pressure in this crucial market over the last three weeks, it is due to higher oil prices, the poorer than anticipated performance of tourism, and the local investor demand associated with the recent bond issues (these include Air Jamaica and Digicel). He correctly pointed out that some of us are getting excited over movements in the dollar that would be an everyday occurrence in the international foreign exchange market. In any event, he expects the current stability in the foreign exchange market to continue. This appears to be the main reason that the Central Bank expects inflationary impulses to moderate in the September quarter.
HIGHER THAN PROJECTED FOREIGN EXCHANGE RESERVES
He believes one of the principal reasons for the growing investor confidence and associated foreign exchange stability is Jamaica's very strong Net International Reserve (NIR) position. As a result of the buoyant inflows to the foreign currency market, the NIR was US$2.156 billion at the end of June, an increase of US$255.2 million relative to end-March. Gross reserves at end-June were US$2.179 billion, representing 19.6 weeks of estimated goods and service imports.
Lower economic growth projected for fiscal year.
The Bank estimates that there was moderate growth in the June quarter. This growth emanated primarily from services, as expansion in the goods producing sectors was constrained by an estimated decline in agriculture.
With the damage (particularly from flooding) to the agricultural sector due to the recent passage of Hurricanes Dennis and Emily, the Bank has revised its growth forecast downwards for the September quarter (due to damage to agriculture from unfavourable weather conditions and the expected underperformance of tourism) and also for the fiscal year. They expect that expansion in the real sector will be led by mining, construction, manufacturing and distribution.
MORE CONSERVATIVE MONETARY POLICY
With the concerns regarding inflationary pressures, in the near term the Central Bank intends to maintain a conservative policy stance consistent with the targets in the financial programme. However, the Governor clearly suggested at the press conference that he "doesn't want to use the full range of monetary policy instruments" to tighten policy. Last year, he said, the Central Bank was 'particularly aggressive' in lowering interest rates. This year, the Governor advises "interest rate cuts were never programmed to be aggressive."
In their press release, The Central Bank suggests that when "inflationary tendencies are reversed and growth momentum resumes, the Bank will adjust policy accordingly so as to continue on our path to attaining inflation in line with that of our major trading partners." The Governor appears to believe that in fact "we have a little more scope for a further reduction in interest rates", presumably once inflation declines as is currently anticipated by the Central Bank. Whilst the Governor acknowledged that growth is expected to be slower than anticipated, because of higher than anticipated inflation, nominal GDP will probably be higher than projected so that we should still meet our key "balanced budget" target. Overall, the Central Bank believes that there is a "growing level of investor confidence in the sustainability of the current direction of monetary policy."
The Governor's press conference suggests that the economic situation is still positive overall. The fact that the "balanced budget" target currently appears to be highly attainable means that our debt dynamics and thus our overall debt to GDP situation will continue to improve from the approximately 150 per cent it was as recently as 2003. In essence, we have moved out of the hospital's intensive care ward into the ward for recuperating patients, as far as our debt situation is concerned, and hopefully we will soon be able to check out. However, recent macroeconomic pressures, particularly the higher than expected inflation, are of immediate concern, particularly for the poor. Real interest rates are now negative on a historical basis, even before withholding tax, limiting the scope for further interest rate reductions. Higher than expected inflation also puts pressure on the public sector wage restraint that we have seen as part of the public sector Memorandum of Understanding, which combined with sharply falling interest rates has been a critical element in making a balanced budget an achievable possibility.
Whilst the domestic capital market has been very supportive of our domestic debt up to now (and I still expect this to continue), tolerating even negative real rates, it is very important for macroeconomic stability that inflation falls in the second half of the fiscal year as is currently projected by the Central Bank. Our current stock market weakness reflects this recent absence of 'good news', most of which had already been incorporated into our local market from last year.
It will require a new positive confidence shock for this leading indicator to recover, particularly with our still rising crime rate. The planned signing of the Partnership for Progress should be a renewed source of local investor confidence, one of many building blocks required on the road to our achieving the long awaited economic takeoff necessary for the economic betterment of every Jamaican.
