Aug 2010 Financial News

Inflation tamed. BOJ forecasts hit the mark

Aug 13, 2010

Bolstered by the success of policy reforms, inflation targeting and economic performance that came within projected levels, the Governor of the Bank of Jamaica (BOJ) Brian Wynter yesterday reiterated the Central Bank's commitment to economic stability and said the results for the quarter should improve investor confidence.

"Most observers and pundits were sceptical of our forecasts because they expected them to be less optimistic. The end point came out in line with what we were indicating," he said of the target for inflation.

The Bank had projected inflation for the fiscal year 2010/11 toward the lower bound of the 7.5 to 9.5 per cent range. Wynter told journalists that the June performance indicate that the projections were accurate.

"I would say that what you are seeing is a range from 7.5 to 9.5 and we still expect the outturn to come in at a lower end," he said.

Headline inflation fell to 2.6 per cent for the June quarter, close to the lower bound of the forecast range of 2.5 per cent to 3.5 per cent for the quarter, despite a significant increase in bus fares. Lower imported commodity prices, exchange rate appreciation and weak consumer demand also moderated inflation for the quarter.

The Bank is forecasting a further deceleration in headline inflation for the September quarter in the range of 1.5 per cent to 2.5 per cent contingent on stable capacity conditions, declining inflation expectations and stability in the foreign exchange market.

"Six months ago I sat in a room with journalists who thought that that was a gross underestimation of what the inflation figure could be. They were not reckless, the expectation for inflation that they were hearing from the business sector and others at the time was more in the 15 to 20 per cent range," Wynter said. "And indeed as you know, some businesses would have found themselves committing to some contracts at the time with these higher rates when the Bank had said 7.5 to 9.5," he argued. Wynter said given the improvements in the general performance of the economy, those projections should be more acceptable now.

However despite what appears to be the early stages of a global recovery, economic growth remained flat in the June quarter with real GDP ranging between 0.0 to 1 per cent. Weak performance is expected to continue in September with growth projected to range between zero and 1 per cent following the resumption of activity in the bauxite sector and with projections of a rebound in agriculture, forestry and fishing, transport, storage and communication and electricity and water.

The financial markets experienced the "sharpest quarterly appreciation since the June quarter of 1996" with a 4.1 per cent appreciation of the Jamaican dollar relative to the USD, the strongest appreciation took place in the June quarter when the rate strengthened by 2.9 per cent. The Bank intervened to smooth the pace of the exchange rate movements by purchasing US$54 million from the market, Wynter disclosed. This also served to increase the Net International Reserve (NIR) stock at the end of June.

"The preference for Jamaican dollar assets was reflected in increased net private capital inflows which more than offset the demand for resources to meet current transactions," said Wynter.

However, losses to the BOJ are expected following a reduction in interest income from foreign assets, which the BOJ is now holding more of through the purchase of the proceeds of multilateral loan inflows. Additionally with the implementation of the Jamaica Debt Exchange (JDX) income from government securities has been reduced. This is compounded by the fact that interest payments on open market liabilities remain higher than those earned on assets.

For the end July 2010, foreign assets declined by US$45.48 million, liabilities increased by US$17.67 million and Net International Reserves declined by US$63.15 million to bring the NIR's total to US$1.732 billion, the equivalent of 19 weeks reserves of goods and services imports -still above the benchmark 12 weeks supply.

Movements in the exchange of the Special Drawing Rights (SDR)/USD is also expected to produce losses, said Wynter. The SDR, the 'currency' of the Standby Arrangement with the International Monetary Fund (IMF), attracts a special rate relative to a 'basket of currencies', which includes the USD, CND and the euro.

While the IMF fixes a rate for target assessment under the Stand-By Arrangement, actual rate changes affect the balance on the BOJ accounts.

"We agreed to use a rate so the target figures and the performance doesn't move all over the place. But in the real world they move and banks' balance sheet and profit and loss accounts operate under the principles of international accounting standards and international auditing standards. Therefore gains and losses based on changes in exchange rates must be reflected in the accounts and reported at the appropriate time," said Wynter.

"However, the overall loss is not expected to have an impact on money supply or inflation as the Bank will manage its balance sheet to offset any such impulse that could conceivably emanate from the BOJ losses," Wynter said.

The BOJ also pointed to lower financing costs for the public and private sector, more stable financial markets, less volatility in domestic prices and sustained growth.

"During the June 2010 quarter, we continued to see signs of that transformation," said Wynter. Indications include lower market driven interest rates, a stronger exchange rate, a decline in inflation expectations and a strong NIR.

"The Bank of Jamaica remains committed to its mandate of maintaining a stable macroeconomic environment characterised by orderly financial markets and stable consumer prices.These are necessary macroeconomic conditions for sustainable growth and development," Wynter declared.


Source:
By Alicia Roache
roachea@jamaicaobserver.com
Friday August 13, 2010
Jamaica Observer

http://www.jamaicaobserver.com/business/Inflation-tamed_7876342