News Release
12 November 2003
Quarterly Press Briefing
12 November 2003
Derick Latibeaudiere
Governor
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 nearterm.
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
1
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
2
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 outturn 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.
3
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
4
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.
Thank you.
BANK OF JAMAICA
5