Bank of Jamaica outlines plans to become ‘modern’ central bank

Initiatives to implement inflation-targeting framework and liberalise forex rate already under way; IMF says strengthening autonomy will help
bank-of-jamaica
Bank of Jamaica: plans to implement a ±3.5% band around a central inflation target of 5.5%

The Bank of Jamaica is to undergo an ambitious reform process this year as it attempts to align itself with international best practice and become “a more modern central bank”.

In a communication published by the International Monetary Fund (IMF) on April 18, Jamaica’s central bank announced inflation-targeting and foreign exchange liberalisation at the top of its agenda for 2017.

Responding to the fund’s financial support in a ‘letter of intent’, Jamaican authorities said the central bank plans to implement a ±3.5% band around a central inflation target of 5.5%.

“We expect to narrow the band to ±2.5% for 2018, until the end of the programme,” an attached memorandum stated, noting the central bank would review and “potentially tighten” this target based on macroeconomic conditions.

Should inflation “breach” the target, the Jamaican authorities will seek IMF assistance to understand the reasons for the breach, create policies to prevent it from happening again and install corrective measures.

In support of the inflation-targeting regime, the central bank has been slowly adapting its monetary operating framework.

By June, the central bank hopes to have transitioned from using its policy rate for the 30-day certificate deposits to the overnight rate. Such a change, Jamaican authorities have said, will increase the central bank’s “signalling power”.

In preparation for the shift, the central bank has narrowed its interest rate corridor from 425 basis points to 300bps, by reducing the overnight lending rate from 7.25% to 7% and raising the overnight deposit rate from 3% to 4%.

The government and central bank have also committed to improving exchange rate flexibility as an additional support to the new inflation-targeting framework.

Achieving the central bank’s inflation objectives may require lower policy rates in the coming months, but this will depend on the evolution of incoming data
IMF staff

The central bank has said it will make forex sales for “smoothing excessive currency market volatility” while establishing multiple-price forex auctions as a market-based exchange rate pricing mechanism by June.

Such changes will “modernise the central bank’s toolkit”, said IMF staff, emphasising a market-determined and flexible exchange rate remains “crucial” for the Caribbean nation.

IMF directors added the central bank’s efforts would “improve price discovery in the foreign exchange market, and facilitate the Bank of Jamaica’s market-based purchase of international reserves”.

To prepare, the central bank is “working to further improve its high-frequency forecasting of foreign exchange flows from corporates, banks, exchange houses and securities dealers”, in addition to improving how it monitors banks’ net open forex positions.

“Achieving the central bank’s inflation objectives may require lower policy rates in the coming months, but this will depend on the evolution of incoming data,” staff from the IMF concluded in their latest assessment.

The fund has praised the authorities’ “cautious approach”, given the country’s susceptibility to changes in oil prices and the potential for volatility following the government’s prepared tax package. However, if monetary policy is “slow to react” to sustained low inflation, this could “hamper” the central bank’s ability to achieve its inflation target, ultimately “eroding credibility”.

Greater autonomy

IMF staff have suggested that revising the central bank’s governance and independence framework would help to improve operational autonomy and “further strengthen” credibility.

In its previous assessment, the IMF recommended reinforcing the Bank of Jamaica’s independence by tweaking the Banking Act; a suggestion Jamaican authorities have responded to positively.

“To strengthen the accountability of the central bank, in the context of transitioning to inflation targeting, we will submit revisions to the Bank of Jamaica Act to Parliament by February 2018,” Jamaican authorities affirmed.

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