Did the Bank of Jamaica wait too long to cut interest rates? Finance Minister Nigel Clarke moves to IMF at the end of October. Was he the best Finance Minister in the Western Hemisphere?
At its monetary policy committee (MPC) meetings on the 16th and 19th of August, the Bank of Jamaica (BOJ) unanimously agreed to reduce its policy rate by 25 basis points to 6.75%, effective Wednesday, August 21, 2024. This was the first cut since it began its tightening cycle in 2022, when it raised its policy rate from the pre-pandemic rate of 0.5% to 7%.
A key justification for the cut was that the latest annual inflation number for July of 5.1% was the fifth consecutive month in which inflation fell within the Bank’s target range of 4 to 6% (an earlier-than-anticipated return), while one measure of core inflation that excludes the prices of agricultural food products and fuel was 4.5% in July, a progressive lowering of underlying inflation this year.
Despite damage from Hurricane Beryl to the agricultural sector, preliminarily estimated at J$5.7 billion or 0.2% of GDP, inflation is projected to largely remain within the Bank’s target range over the next two years. The BOJ estimates inflation will rise temporarily from its current level and breach the upper end of the Bank’s target range over the next three to five months (August to December 2024) due to the negative impact of the hurricane on agricultural supplies before returning to the target range.
Responding to the question posed as the headline of this piece, namely whether they waited too long to cut interest rates, Bank of Jamaica Governor Richard Byles stated that business people may have sensed a slowdown in February or March, but the BOJ has to go by the data provided by Jamaica's statistical institute Statin, so the slowdown is only becoming clear in the data in July and August.
It is worth expanding on this point, as businesses have been complaining of weak consumer purchasing power since at least February or March this year (likely what Byles is referring to), while construction has been weak since last year (it had boomed during the COVID period), and hotel-based tourism has been reported as weak from May of this year. Of course, there have been industry concerns of potential tourism weakness emerging ever since the unusually severe Level 3 State Department travel advisory warning in January, which was recently toned down somewhat, but remains a Level 3.
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