Implementing Monetary Policy

            
  • The design and implementation of monetary policy is guided by the Bank’s understanding of the monetary transmission mechanism in Jamaica (see Figure 1). Based on empirical evidence, the main transmission channel of monetary policy changes to inflation in Jamaica is via the exchange rate with a smaller role for the credit channel. Most of the effect of a change in the monetary policy interest rate on inflation occurs within two to three quarters of the policy change and can last for two to three years. The impact on output is historically quite negligible with a lag of approximately two to three quarters, but can persist for almost three years.1

  • In September 2014, the Bank established an interest rate corridor with the introduction of an unlimited overnight lending facility as well as a two-week lending facility. The aim was to provide liquidity assurance to the financial system and concurrently strengthen the monetary policy transmission process. The introduction of the corridor (i) established a ceiling for short term private money market interest rates and (ii) realigned the Bank’s lending and deposit rates (over 30-days). The ceiling of the corridor was determined as a spread over the policy rate.2 On implementation, the ceiling of the corridor was set at 375 basis points (bps) above the signal rate (then the rate on the Bank’s 30-day Certificate of deposit). As money market rate volatility dissipated, this spread was reduced to 200 bps by end-June 2017 (see Figure 2)

  • On 01 September 2016, the BOJ increased the rate on its overnight deposit to 3.0 per cent from the long standing 0.25 per cent as an initial step in transitioning to an overnight policy signal rate from the 30-day CD signal rate. Effective 01 July 2017, the BOJ transitioned to using the interest rate payable on its overnight deposit as the signal rate. The Bank continued to offer 30‐day certificates of deposit to primary dealers and deposit-taking institutions (DTIs) but in fixed volumes offered via competitive multiple‐price auctions. The overnight interest rate corridor was set at 300 basis points with an overnight deposit rate of 3.75% and the overnight Standing liquidity facility (SLF) at 6.75 per cent. Subsequently, the BOJ reduced on four occasions the rate on its overnight deposit to 2.75 per cent by end-March 2018.

  • The Bank’s open market operations toolkit is augmented by occasional lending and sterilization operations to fine tune the distribution of liquidity over a one year time horizon, consistent with the monetary policy objective.

  • The liquidity assessment and fine tuning operations are done on a weekly basis.

  • In addition to interest rates, the Bank makes occasional adjustments to the reserve requirement ratio on foreign and domestic deposits held by deposit taking institutions.

  • In the December 2016 and March 2017 quarters, the BOJ took steps to reduce dollarization in Jamaica by gradually increasing the cash reserve requirement (CRR) on foreign currency denominated liabilities by 6.0 percentage points to 15.0 per cent.

  • BOJ introduced in July 2017 the BOJ Foreign Exchange Intervention and Trading Tool (B-FXITT) to support greater two way movement in the exchange as well to foster the development and to improve the transparency and predictability of the market. A complementary strategy was for BOJ to reduce its footprint in the Market. In this regard, Bank on two occasions reduced by 5.0 pps the foreign currency surrender requirement to 15 per cent over the December 2017 (25 October) and March 2018 (07 February) quarters.

Monetary Policy Transmission

Interest Rate Corridor

[1]This is the subject of extensive and ongoing research. These assumptions about the transmission process are therefore currently under review.

[2]The ceiling of the corridor is being defined as the interest rate on the standing liquidity facility (SLF). However, this facility has a tiered pricing structure where DTIs seeking funding in excess of their prescribed allocation would receive those funds at the Excess Funds Rate (EFR) which was initially set at 550 bps above the signal rate.


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