Friday, November 10, 2006
With inflation trending down, a continuing reduction in interest rates, a stable exchange rate and no external shocks to derail firm progress, it was an upbeat Governor of the Bank of Jamaica (BOJ) who reviewed economic developments in the September quarter.
Speaking at the BOJ's Nethersole Place headquarters on Wednesday, the Governor of the BOJ, Derick Latibeaudiere, said economic developments in the quarter were generally positive, continuing the trend of the three previous quarters. These positive trends in the domestic economy was supported by the generally favourable international economic developments in the review quarter.
Inflation
The Governor pointed out that at the end of September, the 12-month point-to-point inflation was 6.5 per cent - the lowest annual rate since March 2003. For the September quarter last year, the 12-month point-to-point inflation was much higher at 19 per cent.
Headline inflation for the quarter was 2.4 per cent-much-lower than the 4.3 per cent recorded for the corresponding quarter in 2005.
Core inflation was estimated at 1.1 per cent for the quarter, slightly higher than was planned for. Nevertheless, the annual core inflation. which is estimated at 3.8 per cent at the end of September, still remains in line with the BOJ's medium-term trajectory of 4.0 to 5.0 per cent.
"Price increases in the Food and Drink category were the dominant influences on inflation in the September quarter, but despite the impact, these increases were not as great as we had anticipated. In fact, the prices of vegetables, which are usually high in the September quarter, were actually lower than expected, due largely to increased supplies.
"For the December quarter, the bank is projecting continued moderation in inflation. We expect that prices of domestic agricultural commodities will continue to moderate and that the consumer basket will benefit from the lowering of fuel prices. In addition, the demand for some goods and services associated with the Christmas holidays could also influence an upward movement in prices. All told, we expect inflation for the December quarter to be in the range of 1.5 per cent to 2.5 per cent, resulting in inflation of around 8.0 per cent for the calendar year," declared the Governor.
FX market
There was a slowing in the rate of depreciation of the Jamaican dollar to 0.03 per cent in the September quarter, the lowest since the March 2005 quarter. Latibeaudiere noted that the stability in the foreign exchange market was supported by strong private capital inflows, complemented by continued buoyancy in the flows from tourism and remittances during the quarter.
As a result of these flows, the net international reserves increased by US$232 million during the quarter to US$2.342 billion at the end of September. Gross reserves were US$2.4747 billion representing 18.8 weeks of estimated goods and services imports.
Real Growth
GDP grew faster in the September quarter than it did in the June quarter. With the exception of manufacturing, all sectors recorded positive growth. Agriculture and Miscellaneous Services, which include the tourism industry, were the major drivers of growth.
"For the December 2006 quarter, the Central Bank is expecting the macroeconomic conditions to remain favourable. We expect real GDP growth to strengthen as the construction sector rebounds. The mining and tourism industries are also forecasted to record strong growth.
"The bank is anticipating the usual seasonally higher demand for foreign exchange to meet the increased payments for imports for the Christmas holidays. In fact, we are already seeing that the pick-up in demand is putting some pressure on the exchange rate."
However, Latibeaudiere sought to allay fears by forecasting that private capital inflows would remain high, supported by strong flows from remittances and tourism.
"With the NIR now being maintained in a reasonable comfort zone, the Central Bank has the ability and is prepared to augment any temporary shortfall in supplies in the market.
"Consistent with previous years, we are also expecting the usual pick-up in demand for currency in this period to meet the seasonal expansion in consumption expenditure. Accordingly, base money is projected to expand during the December quarter, "said the Governor.
Trafigura and banking confidentiality
The Trafigura affair has placed the local banking sector under the spotlight and raises many questions concerning confidentiality.
Latibeaudiere said that during his 11-year tenure as Governor of the Central Bank, he has never had reason to question the confidentiality of the banking system.
"At the end of the day, you can have the best banking systems in the world but confidentiality breaches are down to the people who manage. In our monitoring of banking affairs we have been very careful in terms of what is done to preserve banking confidentiality.
"It would be of major concern to me if there were breaches of confidentiality at the Central Bank. My staff, whether it concerns prices, interest rates, foreign exchange rates, or whatever we do, maintain a very high level of confidentiality right across the board. I attribute that to the quality of the staff.
It really comes down to a question of the integrity of the workforce. I cannot envisage a system where people take it upon themselves to be judge and jury when it comes to divulging confidential information. That is a recipe for disaster!
"There is no evidence that the systems in place in the commercial banking sector are themselves contributing to a lack of confidentiality. It really comes back to the integrity of the workforce."
FX trading
Still with controversial topics, the Governor addressed the question of investors turning to FX trading in search of higher returns.
"Some very powerful people in the country have been commenting on the concept and what it stands for and the institution involved. I want to take this opportunity to say that I think that investors have to be careful in an environment where they see global rates averaging at a certain level and the returns from one particular source being multiples of that. You have to wonder what other investors throughout the world are doing with their investments and how can people obtain those high rates.
"I want to make it very clear here that we at the Central Bank take no responsibility whatsoever for people who want to invest their funds that way. There will be no recompense or support for anybody who loses their investments."
Latibeaudiere said that for some people there is a culture of living off high interest rates but with the reduction of interest rates, institutions will have to be far more skilled in investments to remain competitive.
"Many institutions, have not made the transition from the high interest rate culture to a situation where interest rates are half of what they once were and that is the issue."
The Governor went on to say that with more mergers of banking institutions particularly commercial banks with brokerage houses, it was time to consider having just one super regulatory body to monitor the sector.
With the economy on a sound footing and encouraging numbers in support, the Governor said that the next challenge was to maintain stability and keep a watchful eye on the country's macroeconomic performance.
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