derick latibeaudiere : the effect of oil prices – the case of the importers presentation by mr derick latibeaudiere, governor of the bank of jamaica, at a round - table discussion during the meeting of latin american network of central banks and finance ministries, washington dc, 19 - 20 october 2006. * * * the sustained increase in oil prices since 2002 has been of tremendous concern to us in jamaica, and it is with a great deal of relief that we welcome the most recent indications of a reversal of the trend. the increases in oil prices since 2002 has been the most ‘ shocking ’ since the first major oil price jolt in the early 1970s - much beyond anything that we had anticipated. the situation in jamaica in the 1970s was much different from what it is today. back then, there were significant structural weaknesses in the economy, which greatly increased the country ’ s vulnerability to external shocks. the impact of the 1973 oil shock uncovered some of those weaknesses and made the situation much more difficult to manage. indeed, the difficulties that we experienced following the 1973 oil shock contributed to jamaica ’ s first borrowing experience with the imf and were to a large extent responsible for the significant increase in inflation that continued to endanger our economy for the next two decades. things have changed since that time. the jamaican economy has undergone significant structural and other changes and the macroeconomic fundamentals are now much better. inflation has moderated and is now much less inimical to our economy. in addition the central bank has built a reasonable reserve cushion to help us deal with shocks of this nature. notwithstanding this, jamaica like most other oil importing countries has felt the adverse effects of the persistent increases in oil prices. this has been particularly noticeable at the pumps and in our electricity rates. but despite the cumulative negative impact, the economy has remained relatively buoyant over the last two years. it is indeed true that some of the very factors that influenced the sustained increases in oil prices were also the factors that contributed to the increased investment, the growth in tourism and the demand for bauxite that jamaica has been experiencing. these factors relate to the acceleration in world economic growth and the demand for commodities including oil, which contributed to the sharp increases in oil prices over the last four years. for me the real concern is the effect that the increases in oil price has on inflation and also on the balance of payments. the price of oil has risen on an annual average basis by approximately 20.

of little change to the near - term outlook for inflation and some improvements in investor confidence following the approval of the four - year eff by the imf ’ s executive board. during the quarter, the bank offered nine variable rate cds and two usdollar indexed notes to the market. these instruments shifted $ 21. 8 billion into longer - tenor securities ( that is, between six and 18 months ) and offset the bank ’ s purchase from the market of us $ 196. 3 million, equal to about $ 19. 3 billion. against the background of these developments, the weighted average selling rate of the us dollar depreciated by 2. 5 per cent for the review quarter. this adjustment followed a depreciation of 6. 0 per cent in the march 2013 quarter. the slower pace of depreciation in the june quarter also reflected the impact of lower demand for foreign currency to meet current account transactions. bis central bankers ’ speeches inflation it is encouraging to be able to report that headline inflation was 1. 2 per cent for the june 2013 quarter, below the outturn of 2. 7 per cent for the march 2013 quarter and well below the forecast range for the june quarter of 2. 0 to 3. 0 per cent that we announced when we last met in may. the inflation outturn for the review quarter was largely due to the lagged passthrough of the depreciation in the exchange rate and the impact of drought conditions on the prices of some agriculture items. however, the impact of these factors was lower than the bank had anticipated. the lower than projected inflation also reflected the impact of a sharp reduction in energy costs, which was not expected, and the effect of weaker than anticipated demand conditions. for the september quarter, the bank is projecting inflation to be in the range of 2. 0 per cent to 3. 0 per cent. the materialization of this forecast would be below the inflation outturn for the september quarters of the last five years. inflation in this quarter is expected to be driven by increases in the prices of domestic agricultural produce and processed foods. in addition, inflation in the period is expected to reflect the impact of higher prices for crude oil and the effect of the seasonal increase in demand related to the summer holidays and back - to - school preparations. however, the announced reduction in communication costs and persistent weak demand conditions are expected to moderate the impact of these factors on the overall price level. headline inflation for july, at 0. 5 per