Brian Wynter: Economic issues and short-term trends for Jamaica
Speech by Mr Brian Wynter, Governor of the Bank of Jamaica, at the Quarterly Press
Briefing, Kingston, 10 November 2010.
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Ladies and Gentlemen:
This morning we are releasing the Quarterly Monetary Policy Report for the three months
ended 30 September 2010. Similar to the previous reports, we have outlined the economic
developments that characterised the review quarter and some insights into the Central
Bank's view of the near-term. In addition, we have updated and reprinted some articles on
issues which have been in the forefront of many discussions in recent months. These articles
relate to the role of a credit bureau in enhancing the efficiency of credit markets as well as
the Bank's role in preserving financial stability.
Review of the September 2010 quarter
The process of transformation in the economy has largely continued in line with the objective
of less volatility in domestic prices, lower interest rates and stable financial markets. Indeed,
economic developments in the September 2010 quarter were, in the main, positive. Annual
inflation continued to fall in line with expectations, interest rates trended down, the foreign
exchange market was relatively stable, net international reserves increased substantially and
the process of fiscal consolidation continued. However, real GDP is estimated to have
continued to decline in the review quarter, albeit at a slower rate than in the June quarter.
The Bank is also estimating that the pace of recovery in the international economy slowed in
the review quarter.
Monetary policy
In the context of these developments, the Bank continued to ease monetary policy in the
review quarter. The Bank's actions continued to be supported by the strengthening of
investor confidence, which has been reinforced by Jamaica meeting successive performance
targets under the Stand-by Arrangement with the International Monetary Fund. In this regard,
the interest rate payable on the Bank's 30-day certificate of deposit was reduced by an
additional 1-percentage point to 8.00 per cent per annum during the quarter. The interest rate
on overnight placements was also reduced by a quarter of a percentage point from an
already very low 0.5 per cent per annum. In addition, the Bank reduced the cash reserve
requirement on Jamaica Dollar prescribed liabilities of deposit taking institutions by
2 percentage points to 12 per cent and the liquid assets requirement also by 2 percentage
points to 26 per cent.
Financial markets
The foreign exchange market was relatively stable for the review quarter despite some
demand pressures in September. This stability was evidenced by the marginal depreciation
of 0.27 per cent in the weighted average selling rate for the review period as investors, in the
main, continued to exhibit a preference for Jamaica Dollar assets. The demand pressures in
September resulted in a 0.78 per cent depreciation for the month and occurred in the context
of reduced net private inflows as well as lower foreign exchange supplies from tourism.
The Bank sold approximately US$20.0 million net to the market during the quarter. Despite
this, the NIR increased by US$177.9 million resulting mainly from the proceeds of an Inter-
American Development Bank loan of US$200.0 million to the Government. At end-September
the NIR stock was US$1.91 billion, substantially exceeding the end-September target under
the IMF Stand-by Arrangement. At that date, gross reserves amounted to US$2.79 billion,
representing 20.5 weeks of projected goods and services imports, comparing favourably with
the international benchmark of 12 weeks.
In the context of relatively buoyant Jamaica Dollar liquidity conditions, stability in the foreign
exchange market and improved investor sentiment, market-determined interest rates
continued to decline in the September quarter. At the end of September the average yield on
the benchmark 6-month Treasury bill was 7.99 per cent a decline of 1.27 percentage
points relative to the yield at the end of June. Similarly, the average yields on the 1-month
and 3-month instruments fell by 0.72 percentage points and 0.77 percentage points to
8.26 per cent and 7.75 per cent, respectively.
Inflation
Headline inflation for the September quarter was 1.3 per cent, below the range of
that we were projecting when we met in August. The out-turn for
1.5 per cent - 2.5 per cent
the quarter is also significantly below the rate of 2.6 per cent recorded for the June 2010
quarter as well as the 3.8 per cent average inflation for the previous five September quarters.
Similar to headline inflation, the Bank's measures of core inflation were all below the rates in
the previous quarter as well as the rates in the corresponding quarter of 2009.
The lower than expected inflation for the review quarter was against the background of a
decline in energy prices, relative stability in the exchange rate and continued weak consumer
demand. Lower energy prices in the quarter were typified by a 2.6 per cent decline in the
average West Texas Intermediate crude oil price. Partly offsetting the impact of the lower
energy prices, however, were increases in the prices of some agricultural products,
particularly in July. This mainly reflected the lagged impact on food prices of drought
conditions from late-2009 to mid-2010.
We are projecting that there will be an up-tick in inflation in the December quarter with
headline inflation expected to be within the range of 2.0 per cent to 3.0 per cent. The projected
acceleration in inflation in the December quarter is largely influenced by the above average
rainfall experienced by the Island at the end of September caused by the passage of Tropical
Storm Nicole, which led to severe damage to local crops and the road network. In this
context, there is expected to be some increase in the prices of select agricultural
commodities, particularly in November and December. However, the Government has
announced plans to import certain food items, which could partly mitigate some of these
increases. In addition, the recent increases in the prices of oil, corn and wheat on the
international market are expected to continue in this quarter.
Real sector
Economic activity is estimated to have remained weak during the September quarter, with
real GDP contracting in the range of 0.0 per cent to 1.0 per cent relative to the sharp decline
in the June 2010 quarter. In fact, real GDP contracted by 2.0 per cent in the June quarter
relative to the Bank's estimate of a decline in the range 0.0 per cent to 1.0 per cent. The
decline in the June quarter followed three consecutive quarters of deceleration in the pace of
decline. The areas in which the declines were sharper than we had estimated were
Agriculture, Forestry & Fishing, Manufacture, Transport Storage & Communication and
Financing & Insurance Services.
The estimated out-turn in the review quarter reflected continued contraction in the
nontradable industries as the tradable industries are estimated to have recorded marginal
growth. In particular, Construction, Manufacture, Finance & Insurance and Electricity &
are estimated to have been the major industries to decline in the quarter.
Water Supplies
Mining & Quarrying was the major influence on growth in some tradable industries.
In the context of the excessive rainfall at the end of September, the Bank's projections
indicate that real GDP will marginally contract or expand in the December quarter in the
range -0.5 per cent to 0.5 per cent. Most industries are projected to contract, with the
exceptions being Mining & Quarrying and Hotels & Restaurant.
Outlook
Looking ahead, there are concerns about the continued weakness in the international
economy. However, the consensus forecast is that the prospects for global growth for 2010
have not changed for the worse. Growth in this year is largely expected to come from the
emerging market economies, such as China and India, as the advanced economies are
projected to experience low to moderate growth.
In light of the outlook for the global economy and recent adverse weather conditions, the
Bank has revised its projection of the performance of the domestic economy for this fiscal
year. The domestic economy is currently being forecasted to contract marginally in the range
of 0.0 per cent to 1.0 per cent for fiscal year 2010/11. This is in contrast to our earlier
forecast of marginal growth for the fiscal year. The change in projection is largely due to the
extent of the fall-out in the June quarter and the impact of Tropical Storm Nicole in the
December quarter. The forecast for a marginal decline in the fiscal year as a whole therefore
depends on there being growth in the March 2011 quarter.
Domestic inflation for FY2010/11 is expected to be at the upper end of the revised forecast
range of 6.0 per cent to 8.0 per cent and within the original target range of 7.5 per cent to
9.5 per cent. This projection is underpinned by continued low consumer demand, a stable
exchange rate and continued moderation in inflation expectations. The risks to the inflation
projection are balanced. The downside risks continue to be a greater than anticipated
contraction in demand due to sharper than expected reductions in real incomes. The upside
risks include adverse weather conditions and higher than anticipated increases in
international commodity prices.
Given the above factors, the Central Bank will remain vigilant in monitoring developments in
the international and domestic economy. In addition, despite the projected uptick for inflation
in the December quarter, the medium-term outlook indicates a resumption of the downward
path. Against this background, the Bank will continue to be cautious in easing its monetary
policy stance.
Conclusion
Ladies and Gentlemen, the successes we have had to date in the macroeconomic indicators
have been assisted by the on-going consolidation of the fiscal accounts. The fiscal
authorities have been meeting their targets under the IMF Stand-by Arrangement and from
all indications the quantitative targets under the September review have also been met.
Both local and foreign investors continue to monitor the country's progress carefully. They
have so far indicated their approval by the preference shown for Jamaican financial assets.
This must not be taken for granted. The success we expect hinges on implementation of the
full slate of reforms that will support lasting stability in the economy. In this regard, the orderly
financial markets and stable consumer prices fostered by the Bank of Jamaica's efforts in
collaboration with its partners and stakeholders will provide the foundation for sustainable
growth and development.
Thank you.