The Bank of Jamaica’s Move to Increase Cash Reserve Requirements

The Bank of Jamaica (BOJ) has recently announced its decision to increase the domestic and foreign currency cash reserve ratio (CRR) for deposit-taking institutions by a percentage point, starting April 1, to rein in inflation and nudge prices back towards the 4 to 6 percent target range. This decision is expected to impact lending rates, as BOJ Governor Richard Byles has stated. This article will discuss the implications of this move, its potential effects on lending rates, and the BOJ’s outlook for inflation in the coming months.

Implications of the Move

The CRR is a percentage of deposits banking institutions hold at the BOJ at zero interest. As a result of the increase, the CRR relating to Jamaican dollar cash reserves will rise from five percent to six percent, while for foreign holdings, it will rise from 13 percent to 14 percent. This is a pre-emptive move to reduce the potential threat of too much liquidity in the system, which could pressure the US dollar market. The BOJ Governor has indicated that this move is expected to impact lending rates, currently around 11.4 percent.

B OJ’s Outlook for Inflation

The BOJ’s Monetary Policy Committee (MPC) has also decided to maintain the central bank’s policy interest rate steady at 7.0 percent. Inflation in the month of January was negative, and annual inflation dropped to 8.1 percent as a result. The BOJ Governor expects inflation to continue to fall to around 7.15 percent by the end of this fiscal year, at the end of March. Byles also expects a return to the target range by December 2023 and for inflation to remain at that level for the medium term generally. This outlook is consistent with global consensus forecasts for a fall in commodity and shipping prices.

Related Facts

• The level of liquidity in the monetary system was between $14 billion and $16 billion as of Monday.
• The BOJ has unveiled the CRR as its newest tool to rein in inflation and nudge prices back towards the 4 to 6 percent target range.
• The BOJ expects liquidity to rise incrementally towards the end of February into March and April.

Key Takeaway

The Bank of Jamaica has recently announced its decision to increase the domestic and foreign currency cash reserve ratio for deposit-taking institutions to rein in inflation and nudge prices back towards the 4 to 6 percent target range. This move is expected to impact lending rates, and the BOJ Governor has indicated that this is a pre-emptive move to reduce the potential threat of too much liquidity in the system. The BOJ also has an outlook for inflation that is consistent with global consensus forecasts.

Conclusion

The Bank of Jamaica’s decision to increase the cash reserve ratio is an important step in its efforts to rein in inflation and keep prices within the 4 to 6 percent target range. This move is expected to impact lending rates, and the BOJ’s outlook for inflation is consistent with global consensus forecasts. It remains to be seen how this move will affect the Jamaican economy in the coming months.