BOJ Sees Concrete Signs Of Recovery

Buoyed by a sharper-than expected-reduction in inflation for the last quarter and estimated growth in the real economy, Jamaica has started to show concrete signs of recovery, which the central bank is forecasting to continue in the current fiscal year.

The Bank of Jamaica (BOJ), in its quarterly monetary report presented yesterday at its downtown Kingston offices, predicted sustained growth and development in the economy but predicated such improvement on continued low interest rates, stability in the foreign-exchange market and a favourable outcome on inflation.

BOJ estimates suggest there was real growth in the domestic economy during the review quarter, coming out at the top of its range of zero per cent to one per cent, comparing favourably with the average decline of 1.2 per cent experienced during the previous four quarters.

Growth was attributable to expansion in tradable industries, particularly mining and quarrying and hotels and restaurants, as non-tradable industries declined.

It is estimated that for the last fiscal year, economic activity contracted between 0.5 per cent and 1.5 per cent, compared with an average decline of 2.1 per cent over the previous two fiscal years.

Brian Wynter, governor of the central bank, said they were forecasting growth in the range of one to two per cent for fiscal year 2011-12, in the context of ongoing government infrastructure programmes and continued improvements in the fiscal accounts.

Most of the growth is expected in the second half of the year.

Growth is also expected to be driven by expansions in mining and quarrying, hotels and restaurants, and agriculture, forestry and fishing.

Wynter said the downside risks to the growth forecast include lower-than-expected domestic demand as a consequence of reduced incomes, adverse weather and higher-than-expected increase in oil prices. The primary upside risk is a greater than anticipated impact of the Government's infrastructure programme.

With headline inflation for the March 2011 quarter coming in at 0.5 per cent, below the bank's forecast of one to two per cent, Wynter said they are projecting domestic inflation for the current fiscal year in the range of six per cent to eight per cent.

uptick expected

Headline inflation for 2010-11 was 7.8 per cent.

The projection aside, there is expected to be an uptick in domestic inflation in the first half of the fiscal year, which runs from April to September, in the context of a forecast for continued volatility in international commodity prices in the near term, Wynter said.

In particular, he said, headline inflation is projected to fall in the range of two per cent to three per cent for the June 2011 quarter.

However, the prices of international commodities are expected to stabilise in the second half of the year, thus contributing to a moderation in the inflation rate.

"The risks to the inflation forecast are balanced, with the upside risks being more than anticipated volatility in international commodity prices, in particular that for oil and adverse weather conditions," Wynter said, adding, "weaker-than-expected domestic demand is the main downside risk."

causes for reduction

The last quarter inflation rate also fell below the 3.3 per cent recorded in the December 2010 quarter and the five-year average of 2.7 per cent for a March quarter.

According to Wynter, the favourable outturn was largely attributable to significantly sharper-than-expected reductions in the prices of domestic agricultural produce due to the recovery of supplies following Tropical Storm Nicole, which caused billions of dollars in damage to the road network, buildings and the agricultural sector last September.

Continued stability in the exchange rate and weak domestic demand also contributed to the reduction in prices during the period, the BOJ governor said. The main inflationary impulses arose from higher international commodity prices and an increase in the national minimum wage.

With a 4.4 per cent appreciation of the Jamaican dollar against its US counterpart during fiscal year 2010-11, aided by a marginal 0.1 per cent revaluation during the March 2011 quarter, the Bank is anticipating continued stability in the exchange rate.

This compares with a 2.5 per cent depreciation of the Jamaican currency for the previous five March quarters, the central bank governor revealed.

"The stability in the review quarter was underpinned by continued net private capital inflows and a reduction in net outflows associated with current account transactions," he said.

Favourable conditions in the foreign exchange market, as well as the purchase of government loan proceeds boosted the net international reserves to US$2.55 billion at the end of March 2011, US$801.3 million above the stock during the corresponding period last year.

Gross revenues at the end of the quarter were US$3.4 billion, representing 22.8 weeks of projected imports of goods and services.

Wynter said that although the bank has continued to be a net purchaser of US dollars from the market during the current quarter, the level of reserves is likely to fall during this period because of the payout of a government global bond which matured last Friday.

Given the favourable developments during the quarter, the bank continued its cycle of monetary easing. As a result, the interest rate on the 30-day certificate of deposit was reduced by 75 basis points to 6.75 per cent. For the last fiscal year, interest rate was reduced by 325 basis points.