How Jamaican monetary policy is moving towards an inflation targeting regime..

Bryan Winter, GOvernor of Central Bank of Jamaica gives this interesting speech,

He points how several steps and policies were needed before Jamaica could transition to an inflation targeting regime:

For several years, the central bank in Jamaica has been operating an ‘inflation targeting
lite’ policy regime. I am sure our colleagues in Chile will confirm that full-fledged inflation
targeting is not something to jump into all of a sudden unless you already have the good fortune
of a conducive economic environment. That environment is now emerging in Jamaica with the
remarkable successes of an ambitious economic reform programme that is now beginning its
sixth year.

For Jamaica to be in a position to consider adopting price stability as the central bank’s
primary objective and the use of the interest rate lever as its main policy tool, several things had
to happen first. Since high public debt and fiscal dominance will undermine the effectiveness of
any central bank, fiscal sustainability is critical to allowing the central bank the breathing space it
needs to conduct an effective monetary policy. Once fiscal operations begin to crowd in the
private sector and net export earnings increase, a sustainable current account balance becomes

Then, the political economy limitations on exchange rate flexibility in a hyper-open
economy like Jamaica’s diminish considerably thereby improving the central bank’s ability to
manage internal and external shocks. In the short space of a few recent years, Jamaica has lived
through this transformation so that today we can realistically contemplate the prospect of
employing modern foreign exchange market practices and full-fledged inflation targeting.

Bank of Jamaica also enhanced its forecasting and policy analysis toolkit so that it can
improve the consistency of macroeconomic projections and frame sound monetary policy on a
continuous basis. In July 2017, Bank of Jamaica adopted the interest rate on overnight deposits
as the policy rate, replacing the interest rate on 30-day deposits.

This refinement in the policy
signal was intended to strengthen the transmission of monetary policy. Other refinements have
included providing a system of liquidity assurance to our banks and narrowing the interest rate
corridor (the difference between the overnight deposit rate and the rate on overnight advances to
banks). Following these changes, the Minister of Finance in September 2017 approved a
medium-term inflation target for Bank of Jamaica for the first time (the target is 4.0 to 6.0 per
cent). Bank of Jamaica also enhanced policy transparency earlier this year by publishing, also
for the first time, a fixed calendar of announcements of monetary policy decisions for the year

These steps, together with the measures to promote exchange rate flexibility in a
modernised foreign exchange market, set the stage for an important date later this year (October)
when the Government is expected to deliver on its commitment to table legislation in Parliament
to modernise Jamaica’s central bank. In support of the adoption of full-fledged inflation
targeting, these legislative reforms will establish an independent central bank that will be
accountable for maintaining price stability as its primary mandate.

He highlights certain milestones:

Inflation in Jamaica has been running at 40-year-lows for the past three years. Inflation
at March 2018 was 3.9 per cent, down from 13.3 per cent at March 2010. When we
experienced inflation at 4.0 per cent in March 2015, it was the lowest for a fiscal year in 48
years. But that was before we reached a new low of 3.0 per cent in March 2016, which
represents the lowest fiscal year outturn since 1967.

The external accounts indicate that, for the first time in its independent history and
in the lifetime of most Jamaicans, Jamaica is sustainably earning enough to pay its bills
without the indulgence of perpetual borrowing. The current account deficit is projected to
remain sustainable over the medium-term. FY2017/18 was the third year in a row where
current account transactions placed no net pressure on the foreign exchange market. This
has not occurred since the early 1960’s.

In the end, he quotes Neruda:

Indeed, at this point I am as confident as the celebrated Chilean poet, Pablo Neruda, when
he declared,“… you can cut all the flowers, but you cannot keep Spring from coming.”

Jamaica’s economic spring is on the horizon.

Similar to what Dr Manmohan Singh during the 1991 budget.

Sir, I do not minimise the difficulties that lie ahead on the long and
arduous journey on which we have embarked. But as Victor Hugo once said, “no
power on earth can stop an idea whose time has come.” I suggest to this august
House that the emergence of India as a major economic power in the world happens
to be one such idea. Let the whole world hear it loud and clear. India is now wide
awake. We shall prevail. We shall overcome.



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