Keith Collister, Gleaner Writer
Latibeaudiere
Bank of Jamaica Governor Derick Latibeaudiere has assigned a favourable rating to the economy, characterised by falling inflation, relatively stable money and foreign exchange markets, a comfortable level of international reserves and accelerating economic growth despite the difficulties in the construction sector.
Latibeaudiere also declared himself "proud" of the government for the quarter's fiscal performance, the Ministry of Finance having managed to hold the first quarter deficit well above target.
Growth for the June quarter was led by agriculture, miscellaneous services, a category that includes tourism, as well as transport, storage and communications.
Latibeaudiere expects continued expansion in growth in the September quarter, driven additionally, by mining and construction.
In his presentation of the central bank's quarterly take on Jamaica's economic performance, the Governor said inflation declined dramatically to 8.4 per cent at the end of June, or less than half the 17.5 per cent reported at the end of June 2005.
Headline inflation
Headline inflation was higher than the previous quarter at 2.8 per cent, an outturn that Latibeaudiere acknowledged was "not too great", but was in line, he added, with the BoJ's forecast, and compared favourably with the 5.7 per cent in the comparable June 2005 quarter.
The higher inflation rate for the June quarter largely reflected increases in the prices of some agricultural commodities, and higher international prices for grain and oil.
Oil remains a volatile commodity, given the Israeli/Hezbollah conflict in the Middle East, fears about Iran's nuclear intent, and more recent developments in Alaska where a pipeline ruptured on the weekend.
In fact, the BOJ governor predicts that inflation will climb higher to about 3-4 per cent in the September quarter on the back of oil and grain, but also because of seasonally higher prices for agricultural commodities and the usual 'back-to-school' price increases.
Core inflation (excluding food and energy) was somewhat below expectations at 0.9 per cent. However, this June quarterly result was consistent with the tight base money management over the previous quarters.
The bank predicts however that some reversal of prices will occur in the second half of the year from a seasonal drop in the price of agricultural commodities.
On that basis, it is holding to the forecasted 10 per cent inflation for the full fiscal year.
Oil price increase
The main threat to fiscal year, and near-term forecasts, are further
increases in the price of oil and the possibility of severe weather conditions affecting agricultural commodity prices.
In the case of the latter, however, hurricane experts this week forecasted that there would be less storms than originally predicted at the start of the season in June.
Based on other international events - including uncertainties about adjustments in US interest rates and oil price movements - the central bank had adopted a cautious stance in its management of monetary policy over the quarter, said Latibeaudiere.
The BoJ's interest rate forecast for the year was therefore "not heroic" according to the Governor, and in his view the central bank had "done well to keep interest rates stable so far".
The Tuesday pause - after 17 rate rises - by the U.S. Federal Reserve in its programme of raising interest rates could see a fall in local interest rates.
The BoJ's Quarterly Economic Report dealt with the issue in some detail.
"A narrowing in the interest rate differential between two countries can trigger incremental demand for fixed income assets in one country relative to the other as investors seek to maintain their desired risk to return ratio," the report said.
"This could lead to capital flight and the consequent depreciation of the riskier currency accompanied by the potentially disruptive affects of inflation."
The report noted that despite a decline of 4.75 per cent between the end March 2001 and the end of June 2006 in the interest rate differential between Government of Jamaica and U.S. six month treasury bills to 7.85 per cent, narrowing had taken place without a commensurate en bloc switch to U.S. assets.
The foreign exchange market was relatively stable in the June quarter, falling only 0.8 per cent, compared with an average depreciation of 1.9 per cent for the previous three quarters.
Net International Reserves (NIR) increased by $31.9 million during the quarter to US$2.11 billion at the end of June, while gross reserves of US$2.29 billion comfortably exceeded the international benchmark of 12 weeks of goods and services.
Latibeaudiere projected that the current account deficit would be relatively high this year at seven to nine per cent of Gross National Product (GNP), an increase driven largely by rising oil prices and an increasing demand for construction material.
The central bank governor was not overly concerned, however, as the current account deficit would, he said, be financed largely by increases in private capital flows.
The Governor said that contrary to popular opinion, the increase in the NIR was not due to overseas borrowing by government, which was almost at zero, net of amortisation, reflecting government policy that it would borrow annually an amount approximating its debt repayment.
In fact, if interest repayment is included, Government activities were overall actually slightly negative for foreign exchange flows.
According to the Governor, foreign exchange inflows from tourism and remittances were also buoyant.
In response to a question on the sustainability of remittances, he argued that while it was not impossible that the rapid growth could slow, he did not see it declining, saying his view was supported by cross country studies of remittances by the Inter-American Development Bank and the World Bank.
As for the fiscal numbers, Latibeaudiere said the cut in capital expenditure - which amounted to $1.7 billion of the $2.5 billion in spending cuts for the June quarter - might not have been deliberate, but it had served to slow down a number of infrastructure projects, including one at the central bank, due, he said, to reduced availability of factors of production for construction.
Despite the potential crowding out affect of the fiscal deficit, Latibeaudiere said it was not a good idea to reduce capital spending just to meet fiscal targets.az
