BOJ Confirms Signs Of Economic Recovery

Governor of the Bank of Jamaica (BOJ), Brian Wynter, confirmed yesterday that the economy has started to show concrete signs of recovery.

“This is due to continued recovery in the global economy, and the process of transformation which commenced in 2010,” Mr. Wynter said during his presentation of the Quarterly Monetary Policy Report, at the BOJ, downtown Kingston.

He stated that interest rates are at historically low levels, the foreign exchange market has continued to be stable and the outlook for inflation is favourable.

“These developments augur well for sustained growth and development of the Jamaican economy,” the Governor observed. He also stated that, with the generally favourable developments over the review period, the BOJ will continue its cycle of relaxing monetary policy.

The latest estimates of the BOJ indicate real growth in the domestic economy for the January – March quarter,  relative to the corresponding quarter last year, continued moderation in the cost of living, the trending down of interest rates, increased stability of the exchange rate and expansion in tradable industries particularly mining and quarrying and hotels and restaurants.

Mr. Wynter observed that the most recent information puts the estimated economic performance close to the top of the bank’s range of 0.0 per cent to 1.0 per cent. This compared favourably with the average decline of 1.2 per cent experienced over the previous four quarters, he said.

“The estimated growth for the March 2011 quarter was largely attributed to expansion in tradable industries, particularly mining & quarrying and hotels & restaurants, as non-tradable industries are estimated to have declined,” he said.

“For the 2010/11 financial year, it is estimated that economic activity contracted in the range of 0.5 per cent to 1.5 per cent. This is in comparison to the average decline of 2.1 per cent over the previous two fiscal years,” he added.

Growth prospects for the entire financial year appeared to be even more positive, according to the bank’s forecast. This “uptick” in economic performance is predicated on continued growth in the global economy, ongoing Government infrastructure investment programmes and continued improvements in the Government’s fiscal accounts, to the extent that the bank is forecasting that the economy will grow in the range of 1.0 per cent to 2.0 per cent for financial year 2011/12.

This growth is expected to be concentrated in the second half of the year, and will be driven by expansions in mining and quarrying, hotels and restaurants and agriculture, forestry and fishing.                                           

The bank cautioned that risks to the growth forecast include lower than expected domestic demand, as a result of reduced incomes, adverse weather and higher than expected increase in international oil prices. On the other hand, the impact of the Government’s infrastructure investment programme may result in higher than anticipated economic performance.

With respect to the cost of living, Mr. Wynter said that price movements have been below the central bank’s projections for the review quarter.

“Headline inflation was 0.5 per cent  for the March 2011 quarter, below the bank’s forecast range of 1.0 per cent to 2.0 per cent which we shared at our last meeting. The data for the review quarter was also notably below the 3.3 per cent recorded in the December 2010 quarter and the 5-year average of 2.7 per cent for a March quarter,” he said.

Mr. Wynter explained that the favourable outturn in the review quarter, was largely due to significantly sharper than expected reductions in the prices of domestic agricultural produce, due to the recovery in supplies following Tropical Storm Nicole. In addition, continued stability in the exchange rate and weak domestic demand contributed to the moderation in prices in the review quarter.

Mr. Wynter also noted that the factors which contributed to price movements, stemmed from higher international commodity prices and an increase in the National Minimum Wage.

 He said that, given the outturn for the review quarter, headline inflation for 2010/11 financial year was 7.8 per cent, down from the 13.3 per cent recorded for 2009/10 financial year. This resulted in headline inflation for the fiscal year being at the lower end of the target range of 7.5 per cent to 9.5 per cent. In addition, for 2010/11 financial year, all measures of core inflation were significantly lower than the rates recorded for the previous fiscal year.

For the 2011/12 financial year, the bank is projecting that domestic inflation will be in the range of 6.0 per cent to 8.0 per cent.

In the context of a forecast for continued volatility in international commodity prices in the near-term, there is expected to be an “uptick” in domestic inflation in the first half of the fiscal year. In particular, headline inflation is projected to fall in the range of 2.0 per cent to 3.0 per cent for the June 2011 quarter.

The prices of international commodities are expected to stabilize in the second half of the year, contributing to a moderation in domestic inflation. In addition, the bank expects a continuation of excess capacity conditions and relative stability in the exchange rate for most of the year.

The central bank is anticipating continued stability in the exchange rate, following the marginal appreciation of 0.1 per cent experienced in the March 2011 quarter.

“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. For the 2010/11 financial year, the value of the Jamaican dollar appreciated by 4.4 per cent against the US dollar,” he said.

The quarterly monetary policy report stated that favourable conditions in the foreign exchange market over the fiscal year, as well as the purchase of Government loan proceeds, resulted in Net International Reserves (NIR) of US$2.5 billion, at end-March, 2011, US$801 million above the stock at the end of March, 2010.

The bank’s gross reserves at end-march 2011, were US$3,4 billion, representing 22.8 weeks of projected imports of goods and services.