By Javaughn Keyes
The Bank of Jamaica’s Monetary Policy Committee, has decided to increase the cash reserve requirement applicable to deposit taking institutions.
The committee has also decided to maintain the policy interest rate at 7 per cent.
Effective the 1st of April, one percentage point will be added to the domestic and the foreign currency cash reserve requirements.
Currently, deposit taking institutions are required to hold a minimum of 5 per cent of their Jamaican dollar-denominated prescribed liabilities and 13 per cent of their foreign currency-denominated prescribed liabilities as cash reserves at the central bank.
These prescribed liabilities include deposits, funds borrowed from other institutions and the interest on these debts.
The committee says the additional liquidity control measure is another tool it expects will help slow inflation.
Meanwhile, the central bank’s Monetary Policy Committee (MPC) has held the policy interest rate at 7 per cent. The MPC also decided to maintain the rate offered to deposit taking institutions on overnight placements, as it says the inflation outlook remains generally favourable. It noted however that risks to inflation remain high.
The BoJ says core inflation, which excludes food and fuel prices, fell to 7.1 per cent in
January 2023.
According to the MPC, the pace of monetary tightening by the US Federal Reserve Board also appears to be slowing, which has factored into the Jamaican monetary policy decision.
The MPC says the next decision, which is due on March 29, will depend on inflation conditions and the Committee seeing more international commodity price reductions coming into domestic prices. It says the fed continuing to slow its policy rate increases will also be factored.
QUESTION 1
a. Outline three (3) economic functions that the Bank of Jamaica (BOJ) performs.
b. Outline the kind of macroeconomic policy measure employed by the Central Bank when it increases the “cash reserves” for commercial banks. Justify your response.
c. Suggest, with explanation, one (1) macroeconomic policy measure that could be used by the BOJ to achieve the same result.
d. Use the data in the following Table to calculate the 12-month point-to-point inflation
(i.e. August 2020 to August 2021).
| Jamaica’s Consumer Price Index (CPI) August 2020 to August 2021 | |
| Month | CPI |
| August 2020 | 252.8 |
| September 2020 | 255.6 |
| October 2020 | 257.4 |
| November 2020 | 257.4 |
| December 2020 | 254.7 |
| January 2021 | 254.2 |
| February 2021 | 254.3 |
| March 2021 | 256.5 |
| April 2021 | 256.8 |
| May2021 | 258.8 |
| June 2021 | 258.4 |
| July | 261.2 |
| August 2021 | 263.1 |
e. Use the data in he Table above to define deflation and list the month(s) where deflation
occurred.
Monetary Policy Formulation and Implementation: The BOJ is responsible for formulating and implementing monetary policy within Jamaica. This involves managing the money supply, setting interest rates, and employing various tools to achieve macroeconomic goals like price stability and economic growth.
Currency Issuance and Management: The BOJ is the sole issuer of currency in Jamaica. It manages the supply of currency in circulation, ensures its authenticity, and promotes the efficient functioning of the currency system.
Banker to the Government and Commercial Banks: The BOJ acts as the banker to both the government and commercial banks. It holds government accounts, manages public debt, and provides banking services to other financial institutions. This role helps maintain financial stability and facilitates government operations.
Macroeconomic Policy Measure – Cash Reserve Increase: When the Central Bank increases the “cash reserves” requirement for commercial banks, it’s employing a prudential monetary policy measure. Prudential measures are designed to ensure the stability and health of the financial system. By raising the cash reserve requirement, the Central Bank mandates that commercial banks hold a higher portion of their deposits as reserves in the form of cash with the central bank. This reduces the amount of funds available for lending and spending in the economy, thereby controlling the money supply and curbing potential inflationary pressures.
Alternative Macroeconomic Policy Measure: An alternative macroeconomic policy measure that the BOJ could use to achieve a similar result is open market operations. Open market operations involve the buying or selling of government securities in the open market. If the BOJ wants to reduce liquidity in the banking system to control inflation, it can sell government securities to banks and financial institutions. This decreases the amount of money available for lending, similar to the effect of increasing cash reserves. Banks purchase these securities using their reserves, leading to reduced lending capacity.
Calculation of 12-Month Point-to-Point Inflation: To calculate the 12-month point-to-point inflation, subtract the CPI of August 2020 from the CPI of August 2021, and then divide by the CPI of August 2020. Finally, multiply by 100 to express the result as a percentage:
Inflation = ((CPI August 2021 – CPI August 2020) / CPI August 2020) * 100
Inflation = ((263.1 – 252.8) / 252.8) * 100 Inflation ≈ (10.3 / 252.8) * 100 Inflation ≈ 4.07%
The 12-month point-to-point inflation from August 2020 to August 2021 is approximately 4.07%.
Deflation and Months of Occurrence: Deflation refers to a sustained decrease in the general price level of goods and services in an economy. It signifies negative inflation. In the provided CPI data, deflation occurred when the Consumer Price Index decreased from the previous year. Based on the data:
Deflation occurred in the months of:
December 2020: CPI decreased from November 2020.
January 2021: CPI decreased from December 2020.
During these months, the CPI values declined compared to the same months in the previous year, indicating deflationary conditions.
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