Bank of Jamaica lowers Policy rate

The Bank of Jamaica (BOJ) on Wednesday June 27, 2018 announced its decision to lower its policy rate (the interest rate offered on overnight placements with Bank of Jamaica) by 50 basis points (bps) to 2%, effective June 28, 2018.

This increase in monetary policy accommodation reflects i) its assessment that inflation over the June 2018 to December 2018 quarters is likely to remain below the target of 4% to 6% and ii) the risk of projected inflation for first quarter 2019 not meeting previous expectations.  The measures were therefore aimed at fostering greater credit expansion and a faster pace of GDP growth which will support inflation returning to the target of 4% to 6%.  

This marks the third time the benchmark rates are being reduced since the start of the year.   The central bank previously cut rates by 25bps (to 2.75%) in February and more recently rates were slashed by another 25bps (to 2.50%) in May.

This downward trajectory in the BOJ policy rates reflects a key difference in policy direction between the BOJ and US Central Bank (The Federal Reserve or “The Fed”) which effected two policy rate hikes since the start of the year (25bps to 1.75% in March and 25bps to 2% in June).   This came on the back of more favourable outturn in key economic indicators such as GDP, unemployment and consumer spending and inflation.    In light of these stronger fundamentals and Trump’s stimulus package, consensus expectations are for inflation to trend upwards, above the target rate of 2%, thereby prompting further rate hikes.

With BOJ and Fed policy rates now equal at 2% and the likelihood of further divergence, there will no doubt be implications for the JMD to USD exchange rate.  With no differential between Fed and BOJ benchmark rates, we anticipate that investors will have a greater appetite for USD denominated assets going forward.