12 November 2003
Quarterly Press Briefing
12 November 2003
Good morning Ladies and Gentlemen. Welcome to the Bank of Jamaica’s Quarterly Press Briefing.
Today we are releasing our 12th Quarterly Monetary Policy Report. As usual draft copies were sent to all media houses as well as to the institutions represented here today. The Report will also be posted on the Bank’s website later today.
In reminiscing briefly on the period since we launched the first report, I have found the recurring themes to be those associated with the typical challenges faced by small open economies - periodic bouts of instability in the foreign exchange market fuelled by uncertainties regarding fiscal policy, external shocks, which affect foreign exchange earnings, and speculation supported by excess domestic liquidity. The response to these challenges has been monetary tightening and a gradual easing as the way becomes clearer.
Our latest QMPR explains the Central Bank’s action in the last quarter and outlines the near-term prospects, as we see them. These press briefings have at times facilitated discussions on the economic developments that affect our daily lives and I believe that this helps the public to share in the vision of a stable economic environment that will facilitate growth and development. We continue to be fully committed to the achievement of low and stable inflation despite the deviation we have seen in recent months. Having said that, I will now give a brief review of economic developments in the September quarter. From there I will speak to the recent challenges, and outline the Bank’s forecast for the near-term.
Happily, for the Central Bank, there was relative stability in the foreign exchange market during the September quarter. This stability, which was in evidence from the last month of the June quarter, was underpinned by the Bank’s tighter liquidity management in that quarter. The lower levels of liquidity in the market contributed to the restoration of investor confidence in macroeconomic policy and facilitated a gradual easing of monetary policy. Accordingly, interest rates on the Bank of Jamaica’s longer-term reverse repurchase instruments were reduced three times. Consequently, at end September the rate on the 365-day instrument was 24.0 per cent, a reduction of 600 basis points.
The continued reduction of rates on the Bank’s open market instruments, the relative stability in the foreign exchange market and the favourable out-turn for the fiscal accounts in the June quarter, all contributed to an improvement in the level of confidence. This was manifested in the willingness of investors to accept lower rates on Government’s securities as well as in the incremental investment in Bank of Jamaica’s securities. The yield on Government’s 6-month Treasury Bills declined by 504 basis points during the quarter. Similarly, the yields on all other Government securities declined during the quarter.
There was an expansion of 0.7 per cent in the monetary base during the quarter. The sources of this expansion were: Government’s draw-down of its deposits at the BOJ, the Central Bank’s purchase of Government securities and a build–up in the net international reserves (NIR). The liquidity created was, however, partly offset by the Bank’s incremental issue of $6.6 billion in open market securities, which was achieved in spite of the lower rates that were offered.
Within the context of tight liquidity conditions, investors converted some of their foreign currency holdings to augment their Jamaica Dollar positions. This contributed to the increase in the NIR, which also benefited from foreign currency borrowing of Central Government during the period.
For the quarter, the NIR increased by approximately US$55.0 million to
US$1 82.6 million, relative to end June. At end-September gross reserves represented 12.6 weeks of estimated goods and services imports.
The increased foreign exchange flows and tighter liquidity conditions also contributed to a marked slowing in the rate of depreciation of the domestic currency during the quarter. The weighted average selling rate depreciated by 1.2 per cent relative to an average depreciation of 7.0 per cent over the two previous quarters. For the review quarter the average daily depreciation was J$0.01, significantly below daily averages of J$0.08 and J$0.04, which obtained in the March and June quarters, respectively.
Despite this slower rate of depreciation and the shocks to inflation there was an improvement of 12.1 per cent in the Real Effective Exchange Rate (REER) index for the twelve-month period ended 30 September. Similarly, there was an estimated gain of 11.1 per cent in external competitiveness for January to September 2003.
Let me pause to say that the gains in competitiveness suggested by the REER cannot be fully realized unless there are continued improvements in efficiency and productivity levels in the Jamaican economy. Only in embracing this philosophy will we as a country produce goods and services that are competitive with the global economy. This is an imperative as the world moves to a more liberalized trade environment. To assist in the understanding of some of the related issues in this changing global environment, we have set out brief reviews on Jamaica’s move towards compiling an International Investment Position as well as some of the issues and implications of the Fifth WTO Ministerial Conference in Boxes 1 and 2.
As I mentioned earlier, there were some shocks to headline inflation in the review quarter. The inflation rate for the September quarter was 4.6 per cent, less than the rate of 6.0 per cent recorded in the previous quarter, but more than twice that of the corresponding quarter of 2002. As a result, the inflation rate for the first half of the fiscal year was 10.8 per cent relative to the 4.1 per cent recorded in the previous fiscal year. The out-turn in the quarter was largely due to increased bus fares, the lagged effect of exchange rate depreciation, and adverse international commodity price movements. Additionally, there were higher wages for artisans, an increase in the rental for telephone lines as well as the residual effects of recent revenue measures. The seasonally higher costs associated with the new school year and the cyclical declines in agricultural supplies were also contributory factors.
Core inflation was 2.3 per cent for the September quarter, similar to the estimate for the previous quarter but much higher than the 0.8 per cent than was recorded in the September 2002 quarter. In spite of the relatively high estimate for the review period, the estimates indicate a downward trend in monthly rates. Core inflation was estimated at 0.9 per cent for July, 0.8 per cent for August and fell to 0.5 per cent in September. This downward trend was consistent with the tight monetary policy of the June quarter.
The economy was estimated to have recorded strong growth in the September quarter, continuing the trend of the earlier quarters. All sectors were estimated to have grown in the review period, with the strongest growth emanating from Electricity & Water, Transport, Storage & Communication, Construction and Miscellaneous Services. In addition, production levels in the Agriculture and Mining sectors are estimated to have normalized relative to the declines that were recorded in the September 2002 quarter. The rebound in the Agriculture sector was largely driven by expansion in domestic crop production, while the significant increase in capacity utilization was the driving force behind the growth in the mining sector. The estimated growth in the real sector was supported by continued strong expansion of 10.7 per cent in loans to the private sector. Construction & Land Development, Transport, Storage & Communication and Tourism continue to be the major beneficiaries of the growth in loans.
As you are aware, the fiscal performance in the September quarter deviated from what was expected. Provisional data indicate that the operations of the Central Government resulted in a deficit of $7.9 billion or 1.6 per cent of GDP for the quarter relative to the target of a surplus of 0.1 per cent of GDP. This out-turn was mainly influenced by lower revenue flows. The primary surplus was estimated at 2.5 per cent of GDP relative to a target of 3.5 per cent reflecting the shortfall in revenues in the context where there was a containment of non-interest expenditure during the quarter.
RECENT DEVELOPMENTS AND OUTLOOK
Since the beginning of this quarter we have observed some intermittent instability in the foreign exchange market, particularly towards the end of October. This has been associated with large maturities of Government securities, which were not fully reabsorbed. The Central Bank moved swiftly to ameliorate the situation by selling foreign exchange to the market, as well as offering securities from its stock for direct sale to the market. In addition, the Bank re-introduced its 270-day and 365-day instruments, which had been taken out in mid-October.
The Bank has forecasted headline inflation in the range of 1.5 per cent to 2.5 per cent for the December quarter. This is predicated on there being stability in the exchange rate. The likely factors to influence the inflation rate in this quarter are; the adjustments that were made to bus and taxi fares in October, the increase in minimum wage which took effect on 01 November, the second round effects of the recent increases in transportation and utility costs and movements in the price of international commodities. However, we are anticipating that these increases will be partly countered by the moderation in the prices of domestic food items with the seasonal increase in the supply of agricultural commodities. Given this forecast, we are still expecting the inflation rate for the fiscal year to be no more than 13.0 per cent. We are also forecasting that there will be continued moderation in core inflation.
The Bank’s forecast for real growth suggests that the economy will continue to expand in the December quarter. Growth is projected from both the goods-producing and service sectors, mainly Agriculture, Construction, Basic Services, Financial Services and Miscellaneous Services. The Agriculture sector is expected to continue to benefit from the relatively good weather conditions the country has experienced this year. Construction activities are being enhanced by the extensive work involved in the delivery of Highway 2000, while continued growth in Basic Services is inferred from the planned expansion in the production of electricity as well as the buoyancy in the communications sub-sector. Growth in the Miscellaneous Services sector is predicated on the continued buoyancy of the tourism sub-sector.
The immediate challenge for the Central Bank in the December quarter is the continuation of the process of lowering interest rates. The pace of further adjustment, however, will be influenced by stability in the foreign exchange market, underlying inflation and the demand of the public sector for domestic financing.
The Bank’s assessment of supply conditions in the foreign exchange market suggests that the flows should be adequate to meet the usual seasonal demand. This assessment is based on the continued buoyancy in tourism and remittance flows. With this and the Bank’s cautious and proactive approach to monetary policy, there should be stability in the foreign exchange market and continued reduction of core inflation.
With regard to the fiscal accounts, the Minister has reiterated the Government’s commitment to ensuring the achievement of the targets. If the fiscal targets are met, the pace of interest rate reduction could return to the path originally envisioned in the economic programme. This would also facilitate stability in the foreign exchange market and preservation of the net international reserves. The combination of these factors would create the environment for reduced pressure on wages and prices.
Ladies and gentlemen, as I have indicated on every occasion that we have met, stable and low inflation is the only way in which we can attain sustainable growth. As the near-term prospects for growth in the global economy improves, Jamaica must be poised to take advantage of the opportunities that are created. We must all commit ourselves to the growth and development of this our country.
BANK OF JAMAICA