April to June 2017 Volume 18 Number 1

Transcription

1 April to June 2017 Volume 18 Number 1

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3 Overview During the June 2017 quarter, (BOJ) announced that effective 01 July 2017 its signal rate would henceforth be the rate that the Bank pays on overnight deposits held by deposit-taking institutions (DTIs) from the rate paid on BOJ s 30 day certificates of deposit (CD). This change is aimed at strengthening the relationship between the policy rate and market interest rates and continues the series of improvements that the Bank has been making to its monetary policy framework since Further, during the quarter, the Bank conducted a pilot operation of its new framework for the sale and purchase of foreign exchange to and from Authorized Dealers and Cambios. This new framework, BOJ s Foreign Exchange Intervention & Trading Tool (B-FXITT), was subsequently introduced on 26 July 2017 and weekly operations have continued since that date. Details on B-FXITT can be found in Box 3. In addition to the above mentioned refinements to its policy implementation, relaxed its monetary policy stance during the June 2017 quarter. The Bank reduced the rate payable on its overnight deposits and 30-day (CD) by 25 basis points to 3.75 per cent and 4.75 per cent, respectively, during the June 2017 quarter. The standard interest rate on the overnight Standing Liquidity Facility (SLF) was also lowered by 25 basis points (bps) to 6.75 per cent, thus maintaining the width of the interest rate corridor of 3.0 percentage points (pps) between the overnight lending rate and the overnight deposit rate. The policy action was informed by the Bank s assessment that inflation for FY2017/18 will be within BOJ s target range of 4.0 per cent to 6.0 per cent and was consistent with the Government s strong commitment to fiscal consolidation. During the quarter, the Bank also effected a further increase to the foreign currency reserve requirement ratio by 1.0 pp to 15.0 per cent with the aim of reducing the incentive to hold foreign currency liabilities. Annual inflation was 4.4 per cent at end-june 2017, relative to 4.1 per cent at end-march 2017 and 2.5 per cent for the corresponding period in The outturn for the quarter largely reflected higher prices for all components, particularly domestic agricultural prices, energy and transportation costs. Core inflation rose marginally to 2.4 per cent from 2.3 per cent at end-march However, core inflation was lower when compared to 2.7 per cent at end-june The persistently low level of core inflation is attributable to the lower exchange rate pass-through to domestic prices coupled with continued fiscal restraint. The FY2017/18 projection for inflation to end within the target range of 4.0 per cent to 6.0 per cent reflects improved demand conditions, a tempered increase in crude oil prices and administered price adjustments associated with the FY2017/18 tax measures. The risks to the forecast over the next four quarters are assessed to be balanced. The Jamaican economy continued to grow in the June 2017 quarter, registering the tenth consecutive quarter of expansion. Growth in real value added for the review quarter is estimated to be within the range of per cent to 1.0 per cent, driven primarily by tourist-related activities. Declines were, however, estimated for Mining & Quarrying, Agriculture, Forestry & Fishing as well as Producers of Government Services. The estimated growth was mainly attributed to the continued improvement in Jamaica s macroeconomic fundamentals through various structural reforms by the Government as well as increased foreign and domestic investor confidence in the economy. For FY2017/18, real GDP is forecasted to expand within the range of 1.5 per cent to 2.5 per cent, primarily reflecting growth in Manufacture, Electricity & Water Supply, Hotels & Restaurants as well as Agriculture, Forestry & Fishing. Over the next four quarters, the economy is expected to benefit from continued recovery in major industries and the materialization of several growth-inducing initiatives, driven by increased investor confidence and investment activities. Jamaica s growth prospects should continue to be bolstered by improvements in external competitiveness as a result of the structural and macroeconomic reforms being undertaken under by the Government. The three-year precautionary Stand-By Arrangement with the IMF also serves to further strengthen the credibility of Jamaica s economic reform agenda. The Bank will continue to maintain its generally accommodative policy stance in the context of the inflation outlook for the next four quarters. This should support improvements in the domestic macroeconomic environment. However, the Bank remains poised to address any undesirable risks to inflation that may emerge. This policy approach will continue as the Bank seeks to mitigate any upside risks to inflation in order to concretize the benefits of low and stable inflation expectations over the near- to medium-term. Brian Wynter Governor

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5 Contents 1.0 Inflation 1 Inflation Developments 1 Inflation Outlook & Forecast 3 Inflation Risks 3 Box 1: Macroeconomic Model Component Contribution to Inflation 4 Box 2: Businesses Inflation Expectations Survey International Economy Trends in the Global Economy 7 Advanced Economies 7 International Financial Markets 9 Commodity Prices Terms of Trade Jamaican Economy Real Sector Developments 12 Aggregate Supply 12 Aggregate Demand 15 Real Sector Outlook Monetary Policy, Money and Financial Markets 16 Monetary Policy 16 Financial Markets 17 Foreign Exchange Market 18 Box 3: BOJ s New Foreign Exchange Intervention & Trading Tool 19 Equities Market 22 Private Sector Credit and Lending Rates 23 Box 4: Analysis of the improving Trend in Deposit-Taking Institutions 25 Non-Performing Loans for the Five Years ended December 2016 Money 28 Box 5: Credit Conditions Survey 29 Box 6: Jamaica s Macroeconomic Programme under the new SBA Fiscal Developments Implications for Monetary Policy 37 Main Policy Considerations 37 Prices and Output 37 Expectations 37 Financial Markets 38 Monetary Targets 38 Monetary Policy Outlook 38 Box 7: Monetary Policy Transmission 38 Additional Tables 39 Glossary 52 List of Boxes 56

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7 ABBREVIATIONS ARMI B-FXITT BOC BOJ BoJ BPO BRO bps CDs CDI CIS CPI CPI-F CPI-FF CSI CY DIJA ECB EFF EFR EMBI+ EPI ETF EU Fed FOMC FY GDP GOJ GOJGBs IES IMF IPI IRC ITES JCC JMD JSE Agricultural Raw Materials Index s Foreign Exchange Intervention & Trading Tool Bank of Canada Bank of Japan Business Process Outsourcing Bi-monthly repurchase operations Basis points Certificates of Deposit Credit Demand Index Collective Investment Scheme Consumer Price Index Consumer Price Index without Fuel Consumer Price Index without Food and Fuel Credit Supply Index Calendar Year The Dow Jones Industrial Average European Central Bank Extended Fund Facility Excess funds rate JP Morgan Emerging Market Bond Index Export Price Index Exchange-traded funds European Union Federal Reserve Bank Federal Open Market Committee Fiscal Year Gross Domestic Product Government of Jamaica Government of Jamaica Global Bonds Inflation Expectations Survey International Monetary Fund Import Price Index Interest Rate Corridor Information Technology Enabled Services Jamaica Chamber of Commerce Jamaica Dollar Jamaica Stock Exchange

8 LME MonMod NAIRU NDA NIR o/w OBR OMO PBOC PMI QCCS QPC QQE REITS SCT SDRs SEZ SLF SMEs T-Bill TAJ TOT USA USDA USTBs VR-CDs WTI London Metal Exchange BOJ s Macroeconomic Model Non-Accelerating Inflation Rate of Unemployment Net Domestic Assets Net International Reserve Of which Office for Budget Responsibility Open Market Operations People s Bank of China Purchasing Managers Index Quarterly Credit Condition Survey Quantitative Performance Criteria Quantitative and Qualitative Easing Real Estate Investment Trusts Special Consumption Tax Special Drawing Rights Special economic zones Standing Liquidity Facility Small and Medium-sized Enterprises Treasury Bill Tax Administration of Jamaica Terms of Trade United States of America United States Department of Agriculture US Treasury bonds Variable Rate Certificates of Deposit West Texas Intermediate

9 Quarterly Monetary Policy Report April to June Inflation Annual inflation was 4.4 per cent at June 2017, within the target range of 4.0 per cent to 6.0 per cent for FY2017/18. This outturn represented an uptick, relative to the 4.1 per cent inflation rate recorded at March 2017, which reflected marginal acceleration in all the divisions of the CPI, in particular the Food & Non-Alcoholic Beverages, Housing, Water, Electricity, Gas & Other Fuels and the Transportation divisions. The Bank s forecasted range of 4.0 per cent to 6.0 per cent for FY2017/18 is in the context of a projected increase in domestic demand.the risks to the forecast are assessed to be balanced over the next four quarters. Inflation Developments The annual point to point inflation rate at June 2017 was 4.4 per cent, an uptick relative to the 4.1 per cent recorded at end-march 2017 and 2.5 per cent at June The uptick in inflation largely reflected the impact of an increase in agricultural food prices associated with the impact of flood rains in May 2017 and administered price adjustments associated with the tax package implemented at the start of the fiscal year. Looking ahead, inflation is expected to fall within the range of 4.0 per cent to 6.0 per cent for FY2017/18 (see Figure 1 and Box 1). Relative to March 2017, the Bank s main measure of core inflation (inflation that excludes the influence of agriculture and energy prices) increased marginally to 2.4 per cent at June 2017 (see Table 1). Since the March 2016 quarter, core inflation has remained below 3.0 per cent. This relative stability in underlying inflation is consistent with tight demand conditions in the context of continued fiscal restraint, which fostered a lower exchange rate pass-through to domestic prices. The annual point-to-point increase in domestic agriculture prices accelerated in the June 2017 quarter relative to the previous quarter. This acceleration largely occurred in the context of a shock to agricultural supplies due to flood rains that impacted the island in mid-may The excessive rainfall adversely affected most crops and road infrastructure, which supported the acceleration in agricultural price increases. The shock to agricultural supplies is expected to persist for the next two quarters before a normalization in supplies occur in the last quarter of the fiscal year (see Figure 2). Table 1: Inflation and Major Components (Annual point-to-point per cent change) Headline Core * FNB ** HWEG ** Jun Sep Dec Mar Jun Target FY2017/18 : 4.0 to 6.0 Source: STATIN & BOJ Notes: [*] Core inflation represents that portion of headline inflation that excludes the influence of agriculture and energy related services such as electricity and transport. [**] FNB (Food & Non-Alcoholic Beverages) and HWEG (Housing, Water, Electricity Gas & Other Fuels) are major components of the Consumer Price Index (CPI) basket. 1

10 Quarterly Monetary Policy Report April to June 2017 Figure 1: Component Contributions to Inflation (Annual point-to-point per cent change) Source: STATIN & BOJ Figure 2: Estimated Vegetable & Starchy Foods Supplies (Tonnes) Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 0 Source: RADA Agriculture (8.0%) Energy & Transport (2%) Processed (30.8%) Services (Other) (36.1%) Durables (5.1%) Carrot Cabbage Red Peas Onion Tomato (Plummie) Escallion & Thyme Callaloo Pak-choy Pumpkin Lettuce Okra Inflation for processed food items increased for the second consecutive quarter. This outturn mainly reflected the impact of higher wheat and rice prices during the quarter (see International Developments section and Figure 3). Inflation Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Yellow Yam Negro Yam Dasheen Ripe Plantains Sweet Potato Irish Potato (RHS) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 5, ,000 Inflation stemming from other services increased for the second successive quarter. 1 This increase mainly reflected the lagged, albeit weak, impact of exchange rate pass-through to domestic prices. Inflation for other services typically reflects a positive and significant correlation with exchange rate depreciation (see Figure 4). Figure 3: Imported Agriculture Price Indices (Base year = March 2008) Grains Wheat Corn Rice Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Source: Bloomberg & BOJ Calculations Grain prices represent a weighted average of wheat, corn and rice. Figure 4: Inflation from Processed Foods and Non- Energy Services relative to annual depreciation (per cent) Inflation Contrib % Services (Other) (36.1%) Processed (30.8%) Depreciation Annual ExRate Depreciation % Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: A positive correlation with processed food inflation and other services inflation (non-energy related) has been observed. With respect to nonenergy related services there was a correlation of 0.72 at a lag of four quarters. Inflation in processed foods reflects its largest correlation of 0.56 with exchange rate depreciation which occurred within three months Other services are comprised of Rentals For Housing, Maintenance and Repair of Dwelling, Water Supply and Miscellaneous Services Related to the Dwelling, Goods and Services for Routine Household Maintenance, Health, Medical Products, Appliances and Equipment, Health Services, Communication, Recreation & Culture, Education, Restaurants & Accommodation Services, Miscellaneous Goods & Services 2

11 Quarterly Monetary Policy Report April to June 2017 Figure 5: Energy Price Indices (Base year = March 2008) Inflation is expected to stabilize over the subsequent two quarters Source: Fuel (JPS) Petrol Kerosene Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 The Bank s most recent Survey of Businesses Inflation Expectations (IES) continues to reflect that expected inflation remained anchored in the low single digit range, in light of a moderate deceleration in the May 2017 survey. In this regard, continued low inflation expectations are expected to assist in moderating price increases in the nearterm (see Box 1: BOJ s Macroeconomic Model and Box 2: Businesses Inflation Expectations Survey). Over the next four quarters, continued efforts at fiscal restraint and strategic monetary policy actions are expected to assist in tempering price increases. Energy and transport price inflation decelerated relative to the previous quarter. This was mainly underpinned by the lagged effect of lower crude oil prices (see Figure 5). Inflation Outlook & Forecasts Figure 6: Inflation Performance (Annual point-to-point outturn for each fiscal year) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Source: The graph reflects how the actual inflation outturn for each quarter compares to the fiscal year (FY) target bands which are set at the beginning of each fiscal year. Inflation for FY2017/18 is projected to remain within the Bank s target range of 4.0 per cent to 6.0 per cent (see Figure 6). The Bank forecasts that inflation will accelerate moderately over the next two quarters, stemming from lagged effects of agriculture supply shocks and improved demand conditions (see Real Sector Developments section). Inflation Risks The risks to inflation for the next four quarters are considered to be balanced (see Figure 7). The upside risks (higher inflation) take into account worse than anticipated weather, stronger than anticipated demand conditions and higher than anticipated international commodity prices. In contrast, the downside risks (lower inflation) include the possibility of quicker than anticipated recovery of agricultural sector following flood rain damage, lower than projected international commodity prices and weaker than anticipated demand conditions. Figure 7: Inflation Fan (Annual point-to-point forecast) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Source: 3

12 Quarterly Monetary Policy Report April to June 2017 Box 1: BOJ s Macroeconomic Monetary Model (MonMod) Component contribution to Inflation implied by the Phillips Curve The Bank s Macroeconomic Monetary Model (MonMod) evaluates the determinants of inflation in the economy using the theoretical underpinnings of a forward-looking open economy Phillips curve. The key determinants include (1) the surplus or shortage of aggregate supply (output gap); (2) imported inflation and (3) expectations among consumers and businesses. Expectations are modelled as both adaptive (backward-looking) and rational (forward-looking) (see Phillips curve equation below). In addition, inflation expectations increased marginally relative to the previous quarter. This was partly offset by a reduction in imported inflation and moderately weak demand conditions as the output gap is estimated to have remained slightly negative during the quarter. The reduction in imported inflation stemmed from the slight appreciation in the domestic currency observed during the quarter. Inflation at end-september 2017 is projected to increase due primarily to higher imported inflation. In addition, inflation expectations are projected to increase marginally. Demand conditions are expected to remain largely unchanged. 2 π t = απ t 1 + (1 α)π t+1 + β 1 GAP t + β 2 S t + ε t Where π t is the inflation rate at a given point in time, GAP t is the corresponding output gap and S t is imported inflation, which is a composite of the exchange rate change and US inflation. Shocks, or unexplained inflation, are captured in ε t. When compared to end-march 2017, the results from the model suggests that the increase in inflation in the June 2017 quarter mainly reflected the impact of adverse supply shocks (see Figure 1 below). Figure 1: Component Contribution to Inflation Phillips Curve The bars in the chart above represent estimated contributions to quarterly inflation from the Phillips-Curve equation. These components are matched against the actual inflation trend for comparison. Estimation residuals will account for the difference between actual inflation and the aggregate of estimated components derived from the Phillips curve. 2 The Bank s model was re-estimated in July 2017 taking into account the inflation outturn for June

13 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Percentage Index percent Quarterly Monetary Policy Report April to June 2017 Box 2: Businesses Inflation Expectations Survey May 2017 Overview The Bank s Survey of Businesses Inflation Expectations (IES) for May 2017 indicated that inflation expectations decreased marginally relative to the March 2017 survey. Perceptions of inflation 12 months ahead declined to 4.0 per cent from the 4.1 per cent indicated in the March 2017 survey. As was the case in the previous survey, respondents expect that the cost of utilities will reflect the highest increase among input factors over the next twelve months. There was an increase in the proportion of respondents anticipating higher wages during the year. Forty-two (42.3) per cent of the respondents anticipated an increase in wages relative to 37.9 per cent in the March 2017 survey. The expected average increase in wages, however, remained at 6.8 per cent as in the previous survey. Wages & salaries was the input cost least expected to increase. Inflation Expectations In the May 2017 survey, businesses expected inflation rate for CY2017 was 2.0 per cent compared to the outturn of 1.7 per cent for CY2016. This was below the annual point to point inflation rate at May 2017 of 4.6 per cent. Additionally, the respondents expectation of inflation 12 months ahead moderated to 4.0 per cent, relative to 4.1 per cent in the March 2017 survey (see Figure 1). Figure 1: Expected 12-Month Ahead Inflation Question: Based on the average monthly inflation for the last 12 months, what do you think the average monthly rate will be for the next 12 months? Perception of Inflation Control The index of inflation control increased to 270.4, an improvement in the May 2017 survey from in the March 2017 survey (see Figure 2). This outturn reflected a decline in the proportion of respondents who were dissatisfied accompanied by a marginal increase in the share who were satisfied with the authorities control of inflation. Figure 2: Perception of Inflation Control Question: How satisfied are you with the way inflation is being controlled by the Government? Very Satisfied Satisfied Neither Dissatisfied Very Dissatisfied 100% % 80% 70% 60% 50% 40% 30% 20% 10% 0%. Source: Businesses Inflation Expectations Survey Notes: The Index of Inflation Control is calculated as the number of satisfied respondents minus the number of dissatisfied respondents plus 100 Exchange Rate Expectations Relative to the March 2017 survey, respondents expected a marginally faster pace of depreciation in the exchange rate over all time horizons (see Table 1) Inflation Mov. Avg (3 months) 15.0 Inflation Expected (12 months ahead) Table 1: Exchange Rate Expectations Actual Inflation (12-month p-t-p) Question: In March 2017 the exchange rate was J$ = US$1.00. What do you think the rate will be for the following time periods ahead, 3-month, 6-month and 12- month? 7.0 Expected Depreciation (%) Periods Ahead Dec-16 Feb-17 Mar-17 May Month Month Month Source: Businesses Inflation Expectations Survey Source: Businesses Inflation Expectations Survey. Note: The responses have been converted to percentage change. 5

14 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Quarterly Monetary Policy Report April to June 2017 Interest Rate Expectations 3 The majority of respondents expected the Bank s OMO rate to remain unchanged. However, the expected 180-day Treasury Bill (T-Bill) yield, three months hence, is expected to increase to 6.5 per cent from the 6.4 per cent recorded in the March 2017 survey. Perception of Present and Future Business Conditions In the May 2017 survey, perceptions of present and future business conditions improved as the proportion of respondents who believe that conditions will be better increased relative to the March 2017 survey. For the past four years, both indicators have been on an upward trend (see Figures 3 and 4). Figure 4: Future Business Conditions and Real GDP (Index- LHS and GDP RHS) Question: Do you think that in a year from now business conditions will get better or get worse than they are at present? Future Business Conditions Real GDP (Annualized) Figure 3: Present Business Conditions and Real GDP (Index- LHS and GDP RHS) Question: In general do you think business conditions are better or worse than they were a year ago in Jamaica? Source: Businesses Inflation Expectations Survey Note: Rates on foreign currency personal loans were not collected Present Business Conditions Real GDP (Annualized) Expected Increase in Operating Expenses Similar to the views expressed in the February and March 2017 surveys, respondents indicated that they expected the largest increase in production costs over the next 12 months to emanate from utilities. This was followed by stock replacement costs while the least was wages/salary costs (see Table 2). Table 2: Expectations about Operating Expenses Question: Which input do you think will have the highest price increase over the following time periods? 4 Feb-17 Mar-17 May-17 Source: Businesses Inflation Expectations Survey Utilities Wages/Salaries Fuel/Transport Stock Replacement Raw Materials Other Not Stated Source: Businesses Inflation Expectations Survey 3 Question: In March 2017 the 180-day T-bill rate was 6.30 per cent. What do you think the rate will be for the next 3 months and 6 months? 4 The 3-Month, 6-month and 12-month horizons. 6

15 Quarterly Monetary Policy Report April to June International Economy Global economic growth is estimated to have accelerated for the June 2017 quarter, relative to the growth rate recorded for the March 2017 quarter, in line with the previous outlook. This acceleration was underpinned by stronger expansion in a number of economies, offset by weaker growth in the UK. The slowdown in economic activity in the UK reflected a fall-off in the performance of the services and manufacturing industries and was evident in a deceleration in consumption spending. An anticipated increase in the US Fed Funds rate materialized during the quarter. Speculation that the US Administration will pursue more growth-oriented policies further dissipated and fostered a depreciation of the US dollar against a number of currencies. The equities markets in the US, however, continued to grow strongly. Globally, there was also increased demand for risky assets as well as a number of sovereign bond investments given improved economic and political developments in most economies during the quarter. Against this background, projects that the global economy will remain buoyant over the next four quarters with risks skewed to the downside. Trends in the Global Economy Global growth for the June 2017 quarter is estimated to have accelerated relative to the growth recorded for the March 2017 quarter, in line with the previous forecast. This estimated acceleration is underpinned by stronger growth in a number of economies, including the US and Canada, offset by weaker growth in the UK. Table 2: Overview of Selected Variables (Per cent) GDP Actual Current Forecast Previous Forecast as at 25 Apr 17 World USA Canada Japan UK Euro China Inflation USA Canada Japan UK Euro In the context of the outurn for the June 2017 quarter, the projected global growth rate for 2017 of 3.3 per cent remains unchanged relative to the previous forecast (see Table 2 and Figure 8). Figure 8: Global Economic Growth World Growth (BOJ) USA Source: United States of America (USA) Real output growth for the US in the June 2017 quarter is estimated to have strengthened to 2.6 per cent, following an expansion of 1.2 per cent in the China Source: (BOJ) and Bloomberg 7

16 Quarterly Monetary Policy Report April to June 2017 previous quarter. 1 This acceleration reflected higher growth in consumption spending, investments and government spending the impact of which was partially offset by a deceleration in net exports. Table 3: Unemployment Rate for Selected Economies (Quarterly Average Per cent) USA Canada Euro Jun Sep Dec Mar Jun * Source: Official statistics offices, *Bloomberg Consensus forecasts estimates that the US economy will expand by 2.1 per cent in 2017, down from its previous forecast of 2.2 per cent. This downward revision mainly reflects the removal of fiscal stimulus measures from the projections. Over the next four quarters (September 2017 quarter to June 2018 quarter) the Bank projects quarterly US GDP growth to be within the range of 1.6 per cent to 2.4 per cent. This pace is broadly consistent with the growth rate over the previous four quarters and is gradually converging to potential output growth for that economy. Growth in government spending over the next four quarters is, however, anticipated to be lower than earlier projected, due to changes in views about the prospects for US tax reform and other economic reforms. 2 However, the impact of this will be partially offset by higher investment spending as a consequence of a less appreciated US dollar. The unemployment rate in the US at June 2017 was 4.4 per cent, broadly in line with BOJ s forecast (see Table 3). The outturn reflected higher employment in health care, social assistance, financial activities and mining. The unemployment rate is projected to end FY2017/18 at 4.3 per cent, 0.2 percentage points below end-fy2016/17. In this regard, the slack in the US labour market is projected to be smaller than the Bank s previous forecast over the next four quarters. At end-june 2017, annual inflation in the US decelerated to 1.6 per cent, from 2.4 per cent at end-march The Bank projects US inflation to remain below the Fed s 2.0 per cent long run target over the next four quarters. 3 Notwithstanding the benign outlook for inflation, on 14 June 2017, the Federal Reserve Open Market Committee (FOMC) voted to increase the US Fed Funds target range by 25 basis points (bps) to 1.25 per cent (see Figure 9). 4 Figure 9: Policy Interest Rates, monthly data (Per cent) Jun-2013 Sep-2013 Dec-2013 Mar-2014 Source: Bloomberg Jun-2014 Sep-2014 Dec-2014 Mar-2015 United Kingdom (UK) Jun-2015 The UK economy is estimated to have expanded by 1.7 per cent for the June 2017 quarter, a weaker pace of growth when compared to the expansion of 2.0 per cent in the previous quarter. This was also a weaker performance relative to the Bank s forecast of 1.9 per cent. The estimated expansion was Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 Mar-2017 Jun USA UK Euro area Canada Japan China (RHS) 1 This outturn is based on the first of three estimates of US GDP. Also, the outturn for the March quarter was revised downwards from growth of 1.4 per cent. 2 There is much uncertainty about the US administration s plans for tax reform and infrastructure development as the government has focused on repealing and replacing the Affordable Care Act. 3 Consensus forecast and the Federal Reserve have projected that US inflation will end 2017 at 1.9 per cent. 4 The FOMC decided to raise the target range for the federal funds rate In view of realized and expected labour market conditions. The stance of monetary policy however remains accommodative, thereby supporting further strengthening in labour market conditions and a sustained return to 2 per cent inflation.the FOMC updated its dot plot which indicated that policy makers are anticipating one additional rate hike in 2017, consistent with the three predicted for 2017 in their December 2016 forecast. 8

17 Quarterly Monetary Policy Report April to June 2017 informed by unfavourable leading indicators which pointed to declines in the services sector as well as a deceleration in consumer spending. 5 The UK Prime Minister called a general election on 08 June The incumbent party failed to secure an overall majority in Parliament which led to increased uncertainity around the implications of the UK s exit from the EU (BREXIT). In this context, the Bank revised downwards its UK growth projection for 2017 to 1.6 per cent on account of the weaker than expected performance to date. Over the next four quarters, growth in the UK is likely to slow as negotiatons surrounding BREXIT continue. Canada Economic growth in the Canadian economy for the June 2017 quarter is estimated to have tempered to 2.2 per cent, when compared to the outturn of 3.7 per cent for the March 2017 quarter. For the next four quarters, the GDP growth in Canada is projected to be in the range of 2.0 per cent to 2.1 per cent. International Financial Markets The yield-spreads on GOJ Global Bonds (GOJGBs), relative to selected benchmarks, fell during the June 2017 quarter. This was indicative of lower sovereign risk, which reflected the continued confidence in the Jamaican economy in the context of the country s positive performance under the new 3-year Stand- By Arrangement (SBA) with the IMF. At June 2017, the spreads between the indicative yields on GOJGBs and US Treasury Bills and between GOJGBs and the JP Morgan Emerging Market Bond Index (EMBI+) fell by 11 basis points (bps) and 4 bps, respectively, when compared to March 2017 to 3.89 per cent and per cent. These changes were reflected in respective declines of 17 bps and 14 bps in the average yields on the GOJGBs and EMBI+, while the yields on the US Treasuries fell by 7 bps over the period (see Figure 10). Figure 10: Selected Average Sovereign Bond Yields (Per cent) Jun-13 Dec-13 Jun-14 Source: Bloomberg Dec-14 Jun-15 Dec-15 The lower yields on emerging market bonds continued to reflect confidence in the growth prospects of these economies. With regards to US Treasuries, the fall in yields was primarily underpinned by heightened political uncertainty surrounding European elections and a lowering of interest rate expectations for 2017 following the release of weaker than anticipated inflation data. 6 Of note, the decline in speculation of an interest rate hike also emanated from the non-materialisation of pro-growth policies by the US administration. The performance of selected stock market indices were mixed during the June 2017 quarter. Compared to the March 2017 quarter, the Dow Jones Industrial Average (DJIA) and the S&P 500 advanced by 3.3 per cent and 2.6 per cent, respectively. However, the FTSE 100 and the Eurofirst 300 declined by 0.1 per cent and 0.8 per cent, respectively. On a yearly basis the DJIA, S&P 500, FTSE 100 and the Eurofirst 300 increased by 19.1 per cent, 21.1 per cent, 12.4 per cent and 14.4 Jun-16 Dec-16 Jun-17 per cent, respectively (see Figure 11). Dec-17 Jun-18 EMBI+ GOJGB US Treasuries (RHS) UK s service sector accounts for more than 75 per cent of the country's GDP. There was subdued business and consumer confidence in June The Purchasing Managers Index fell to 53.4 in June from 53.8 in May, which was linked to a slower rise in new work across the service economy. Of note, anecdotal evidence cited Brexit-related risk aversion and heightened economic uncertainty as key factors holding back client spending. In addition, household incomes are falling in real terms as wages fail to keep pace with rising consumer prices. 6 General Elections were held in the UK and France during the review quarter. 9

18 Quarterly Monetary Policy Report April to June 2017 As it relates to European equities, the gains in the FTSE100 and Eurofirst 300 partly reflected investor s response to the victory of the En Marche! party in the French presidential election. The market believed their agenda and commitment to Europe could stimulate economic recovery in the region. Figure 11: Selected Stock Market Indices (Year over-year Per cent) Source: Bloomberg DJIA Terms of Trade Jamaica s Terms of Trade Index (TOT) contracted at an annual pace of 7.4 per cent for the June 2017 quarter, relative to an annual reduction of 26.3 per cent registered for the March 2017 quarter. This reflected an annual decline of 4.2 per cent in the Export Price Index (EPI) and a rise in the Import Price Index (IPI) by 3.5 per cent. The reduction in export prices was driven by a fall in implicit tourism prices, while the expansion in the IPI emanated from higher prices for food related consumer goods, fuel, capital goods and raw materials. S&P Eurofirst 300 FTSE 100 Mar-2013 Jun-2013 Sep-2013 Dec-2013 Mar-2014 Jun-2014 Sep-2014 Dec-2014 Mar-2015 Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 Mar-2017 Jun-2017 For FY2017/18, Jamaica s Terms of Trade Index (TOT) is projected to improve by 3.1 per cent, relative to the previously projected improvement of 1.2 per cent. This improved outlook emanated from a downward revision to the Imprt Price Index (IPI) mainly reflecting the revised forecast for crude oil prices. This impact was partly offset by an downward revision to the Export Price Index (IPI). improvement in both the IPI and EPI as a result of lower crude oil prices and an expected increase in implicit tourism prices. Commodity Prices Commodity prices reflected a general decline during the review quarter. The daily average of West Texas Intermediate crude oil prices for the June 2017 quarter declined by 6.9 per cent, relative to the same measure for the March 2017 quarter, but increased by 6.1 per cent relative to the June 2016 quarter. At end-june 2017, the price of crude oil on the international market was US$46.04 per barrel. In addition, average grains prices fell by 7.4 per cent and 3.2 per cent on an annual and quarterly basis, respectively (see Figure 12). Figure 12: The Bank s Price Indices for Imported Commodities Fuel Sub-Index Sources: Bloomberg, World Bank and BOJ Agricultural Raw Material Index Jun-2013 Sep-2013 Dec-2013 Mar-2014 Jun-2014 Sep-2014 Dec-2014 Mar-2015 Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 Mar-2017 Jun-2017 Sep-2017 Dec-2017 Mar-2018 Jun-2018 The decline in crude oil prices for the review quarter occurred in the context of (a) the market s response to reports that the Organization of the Petroleum Exporting Countries (OPEC) had extended production cuts to March 2018, (b) investor s concerns that President Donald Trump s decision to withdraw from the Paris Climate Deal could result in an expansion in US drilling activity and (c) renewed investor concerns that lower crude oil demand and rising production in the US, Libya and Nigeria could Consistent with the outlook for the fiscal year, the Bank expects that Jamaica s TOT will improve over the ensuing four quarters, beginning in the September 2017 quarter. This mainly reflects an 10

19 Quarterly Monetary Policy Report April to June 2017 undermine the efforts of OPEC to shore up crude oil prices. 7 The fall in average grains prices reflected lower prices for corn and soybean, the impact of which was partly offset by increases in wheat prices. The average price of corn for the review quarter declined by 1.8 per cent when compared with the same measure for the previous quarter. On annual basis, corn prices, however, declined by 7.8 per cent. The average of soybean prices for the quarter fell at an annual and quarterly rate of 9.0 per cent and 7.9 per cent, respectively. The price declines were broadly underpinned by forecasts of favourable weather conditions and high global commodities stocks. Average wheat prices decreased at an annual rate of 3.2 per cent but increased at a quarterly rate of 7.3 per cent due to market speculation of reduced production prospects of spring wheat resulting from drought in North America and Europe. Average aluminium prices for the review quarter recorded increases of 21.3 per cent and 3.0 per cent, relative to the June 2016 and the March 2017 quarters, respectively. This outturn largely reflected speculation that there will be a fall-off in Chinese production due to reforms to their production processes. 8 The monthly average of crude oil prices for FY2017/18 is projected to increase in the range per cent, while a decline in the average price of grains is projected in the range Based on the outlook for increased global supplies the risks to commodity prices over the next four quarters are skewed to the downside. 7 The OPEC met on 25 May 2017 and announced an extension to voluntary production cuts through March 2018 that were originally set to end in June The production target was slated to remain at 32.5 million barrels per day through the end of the first quarter of Prices declined by almost 5 per cent on the day of the announcement. 8 In April 2017 Changji County in Xinjiang province ordered the halt of construction at three smelter projects with a total capacity of 2 million tons per year. It confirms the government s toughening stance on supply side reform. Following Changji County s statement, Shandong government also stated in early May that it too will be supportive in supply side reform and will publish all the local enterprises that need to cut capacity and those that have illegal or unqualified capacities. 11

20 Quarterly Monetary Policy Report April to June Jamaican Economy The economy is expected to grow, in real terms, within the range of per cent to 1.0 per cent for the June 2017 quarter, representing the tenth consecutive quarter of expansion. This continued positive performance occurred against the background of sustained progress in the implementation of fiscal and macroeconomic reforms. All industries are estimated to have grown for the review quarter, with the exception of Mining & Quarrying, Agriculture, Forestry & Fishing and Producers of Government Services. The expansion in Aggregate Demand during the period was mainly attributed to growth in consumer and investment spending, the impact of which was partly offset by estimated declines in government consumption and a deterioration in net external demand. For FY2017/18, economic growth is forecasted to be in the range of 1.5 per cent to 2.5 per cent, reflective of expansions in Mining & Quarrying, Hotels & Restaurants, Agriculture, Forestry & Fishing, Manufacturing and Electricity & Water Supply. Over the medium-term, economic activity is expected to expand within the range of 2.0 per cent to 3.0 per cent. 3.1 Real Sector Developments Aggregate Supply The pace of growth of the Jamaican economy for the June 2017 quarter is expected to be within the range of per cent to 1.0 per cent. This estimated expansion reflected a slower rate of growth when compared to the corresponding period of 2016 (see Figure 13 and Table 4). With the exception of Mining & Quarrying, Agriculture, Forestry & Fishing and Producers of Government Services, all industries are estimated to have grown for the quarter. Figure 13: Real GDP Growth (12-Month Per cent Change) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Source: STATIN and Both tradable and non-tradable industries are adjudged to have expanded for the quarter with tradables estimated to have registered a faster pace of growth when compared to the non-tradables (see Figure 14). 1 The growth in the tradable industries was mainly attributed to Hotels & Restaurants and Manufacturing while the estimated increase in the non-tradable industries was primarily associated with Electricity & Water Supply, Finance & Insurance Services and Real Estate, Renting & Business Activities. Figure 14: GDP Growth: Tradable vs. Non-Tradable Industries (12-Month Per cent Change) Tradable Non-Tradable Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: 1 The tradable industries include Agriculture, Forestry and Fishing (traditional export crops), Mining & Quarrying, Manufacturing, Hotels & Restaurants and Transport, Storage & Communication. Nontradable industries include Construction, Electricity, Gas & Water, Finance & Insurance Services, Real Estate, Renting & Business Activities, Producers of Government Services and Other Services. BOJ s estimates of the tradable industry is the sum of all tradable industries total value added while the non-tradable industry is the residual derived from the prior calculation and overall total value added for the quarter under review. 12

21 Quarterly Monetary Policy Report April to June 2017 Table 4: Industry Contribution to Growth (June 2017 Quarter) Contribution Estimated Impact on Growth GOODS to 0.5 Agriculture, Forestry & Fishing to -1.5 Mining & Quarrying to -4.5 Manufacturing to 2.0 Construction to 1.5 SERVICES to 1.5 Electricity & Water Supply to 1.5 Wholesale & Retail Trade, Repairs & Installation 14.9 to 1.0 Hotels & Restaurants to 5.5 Transport Storage & Communication to 1.5 Financing & Insurance Services to 2.0 Real Estate, Renting & Business Activities to 1.5 Producers of Government Services to 0.5 Other Services 5.9 to 1.0 Financial Intermediation Services Indirectly Measured to 2.0 TOTAL GDP 10 to 1.0 Source: and Other Manufacturing (see Figure 16). In relation to Food, Beverages and Tobacco, growth was mainly associated with increased production of beverages, as well as food processing excluding sugar. Similarly, Other Manufacturing is estimated to have recorded growth given the estimated increase in the production of refined petroleum products. Figure 16: Trends in Petroleum Products, Beverages & Tobacco and Food processing (12-Month Per cent Change) Source: Petrojam Ltd. Petroleum Products (L.H.S) Beverages & Tobacco (R.H.S) Food Processing (R.H.S) Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar Hotels & Restaurants is estimated to have grown at a faster pace for the June 2017 quarter, inferred from buoyant growth in airport arrivals (see Figure 15). Figure 15: Total Stop-Over Visitor Arrivals & Visitor Expenditure (12-Month Per cent Change) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: Jamaica Tourist Board Stop Over Arrivals Visitor Expenditure Value added within Manufacturing is estimated to have grown for the review quarter. This expansion reflected growth in both Food, Beverages & Tobacco Electricity & Water Supply is adjudged to have expanded, albeit at a slower pace when compared to the corresponding period of 2016 (see Figure 17). In particular, there was continued growth in electricity consumption, proxied by the increase in total electricity sales. Similarly, water production expanded primarily due to heavy rainfall in May 2017 which was marginally above the 30-year mean rainfall level and that which occurred in the June 2016 quarter. Value added in Transport, Storage & Communication is evaluated to have increased for the June 2017 quarter (see Figure 18). The estimated rise in output for Transport was attributed to an expansion in the number of cruise and air passenger arrivals into Jamaica. This impact was partly offset by a marginal decline in domestic cargo movement. 13

22 Quarterly Monetary Policy Report April to June 2017 Figure 17: Electricity Consumption & Water Production (12-Month Per cent Change) Electricity Consumption Electricity Production Water Production Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Figure 19: National Housing Trust Housing Starts & Completion (12-Month Per cent change) NHT Housing Starts NHT Housing Completion Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: Jamaica Public Service and National Water Commission Source: The National Housing Trust Figure 18: Visitor Arrivals & Domestic Cargo Movement (12-Month Per cent change) Total Domestic Cargo Movements Total Visitor Arrivals Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: The Port Authority of Jamaica & Jamaica Tourist Board Construction is estimated to have expanded for the June 2017 quarter. This performance was largely driven by residential construction as well as other non-fdi infrastructural development. 2 Growth in residential construction was attributed to the rise in housing starts managed by the National Housing Trust (see Figure 19). 3 Agriculture, Forestry & Fishing is assessed to have declined for the review period relative to the growth recorded in June This contraction was chiefly reflected in domestic crop production, the impact of which was partly offset by a marginal growth in traditional export crops (see Figure 20). The decline in domestic production was largely associated with heavy rains which took place in mid-may The industry was also adversely affected by the impact of agriculture pests on crops such as escallion and lettuce. The marginal growth in traditional exports crops was primarily influenced by a slight growth in cocoa and citrus, the impact of which was partly offset by declines in sugar, coffee and banana output during the review period. Mining & Quarrying is assessed to have declined for the June 2017 quarter, reflecting contractions in both alumina and crude bauxite production due to lower capacity utilization (see Figure 21). The decline in alumina production largely reflected operational challenges at both alumina plants. The contraction in bauxite was due to a reduction in demand. 2 This includes the construction and rehabilitation of roads. 3 Growth in NHT housing starts was mainly influenced by Winchester Estate (1003 units started0 housing development in Hanover and Longville-Phase IIA (85 units started) development in Clarendon which occurred in May

23 Quarterly Monetary Policy Report April to June 2017 Figure 20: Domestic & Export Crop Production (12-Month Per cent Change) Domestic Crop Production Export Agriculture trend improvement in consumer confidence to record levels despite marginal declines over the past two quarters (see Figure 23). With respect to the decline in Public Consumption, this was deduced from the Government s continued fiscal consolidation initiatives as reflected in lower government spending on goods and services. Figure 22: Remittance Inflows, Real Personal Loans and Total Credit Card Transactions: (Real Values) (12-Month Per cent Change). -5 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: & Ministry of Agriculture 3 2 Remittance Inflows Total Credit Card Transactions Personal Loans 1 Figure 21: Trends in Crude Bauxite, Alumina & Total Bauxite Production (12-Month Per cent Change) Source: Jamaica Bauxite Institute Alumina (L.H.S.) Total Bauxite (L.H.S.) Crude Bauxite Production (R.H.S.) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun Source: and STATIN Figure 23: Business and Consumer Confidence Index (12-Month Per cent Change) Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Consumer Confidence Index Business Confidence Index Aggregate Demand For the June 2017 quarter, Aggregate Spending is estimated to have increased at a slower pace when compared to the corresponding quarter of This assessment reflects estimated improvements in Private Consumption and Gross Capital Formation, the impact of which was partly offset by declines in Public Consumption and Net External Demand. Growth in Private Consumption was inferred from real increases in the value of credit card transactions, remittance inflows, internet debit (value) and personal loans (see Figure 22). Additionally, the projected growth in private expenditure was supported by a Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: and Jamaica Chamber of Commerce Net External Demand is assessed to have deteriorated over the review quarter, reflecting a contraction in exports and an increase in imports (see Figure 24). The decline in exports largely reflected contractions in the volume of coffee, banana and mineral fuel while increased imports was mainly attributable to 15

24 Quarterly Monetary Policy Report April to June 2017 consumer goods imports, raw materials and capital goods. Figure 24: Trends in Exports & Imports of Goods and Services (US$ Millions) Source: and STATIN Outlook Real GDP is forecasted to expand within the range of 1.5 per cent to 2.5 per cent for FY2017/18 with further projected strengthening over the medium- term. The pace of expansion for FY2017/18 is predicated on sustained growth in the economies of Jamaica s major trading partners, further improvement in labour market conditions as well as growth in aggregate spending. Growth is mainly expected to be reflected in Hotels & Restaurant, Electricity & Water Supply and Manufacturing. In addition, positive trends in business and consumer confidence should be conducive to a greater level of foreign and direct investment, fostering increased economic activities over the near to medium-term. Imports Exports Net Exports Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun The risks to the forecast remain skewed to the downside. These include the non-materialization of investment projects, unanticipated production disruptions, unfavourable weather conditions, and slower than anticipated growth in the economies of Jamaica s main trading partners. 3.2 Monetary Policy, Money and Financial Markets Monetary Policy (BOJ) reduced its signal interest rate, the rate on its 30-day Certificate of Deposit (CD), to 4.75 per cent from 5.0 per cent in April 2017 (see Figure 25). This policy action reflected the Bank s assessment that inflation for FY2017/18 will be within BOJ s inflation target of 4.0 per cent to 6.0 per cent for the fiscal year. The Government s strong commitment to fiscal consolidation under the precautionary Stand-By Arrangement with the IMF supported the Bank s easing of its policy stance. 4 In addition to reducing the policy rate, the Bank lowered the rates on both its overnight lending and deposit facilities by 25 basis points (bps), thus maintaining an interest rate corridor of 3.0 percentage points. 5 Specifically, the rate on the standing liquidity facility (SLF) was reduced to 6.75 per cent with the excess funds rate (EFR) maintained at 9.30 per cent, while the interest rate payable on overnight deposits was reduced to 3.75 per cent. During the June 2017 quarter, the Bank effected a further increase to the foreign currency reserve requirement ratio with the aim of reducing the incentive to hold foreign currency liabilities. The ratio was increased by 1.0 ppt to 15.0%. Figure 25: Interest Rate on BOJ s Certificates of Deposit Source: 30-day CD Overnight CD SLF Repo 4 The continued tight fiscal policy posture supports an easing in monetary conditions. 5 The lower bound of the IRC is determined by the interest rate on the overnight CD, whilst the upper bound is determined by the rate on overnight SLF. 16

25 Quarterly Monetary Policy Report April to June 2017 Jamaica Dollar liquidity conditions were buoyed, during the June 2017 quarter, by the pay out of a $65 billion Fixed Rate 7.5% Benchmark Investment Note which matured in May. In this context there was an uptick in the demand for foreign currency. In response, the Bank sold US$240.5 million (or $32.4 billion) to the market which tempered liquidity conditions during the review quarter. A further US$10 million was sold via the BOJ B-FXITT tool (see Box 3: BOJ s New Foreign Exchange Intervention & Trading Tool). Liquidity was also absorbed via issues of fixed rate Certificate of Deposit (FR-CD s) as well as maturities of Occasional Term Repos (OTROs) which had been issued to smooth the impact of the BMI note which matured. The impact of these actions was partly countered by net foreign currency purchases by the Bank which injected $27.5 billion in the system. Overall, the Bank s operations net absorbed $13.2 billion, which was wholly offset by net injection of $14.1 billion from Government of Jamaica s (GOJ) operations (see Table 5). Table 5: Liquidity Impact of BOJ & GOJ Operations BOJ Liquidity Facility (J$ Billions) equivalent to total maturities and there was a strong preference for the longest tenor. Table 6: Placements & Maturities of BOJ USD Instruments January March 2017 April June 2017 Placements Maturities Average Placements Maturities Average (US$MN) (US$MN) Rate (%) (US$MN) year year TOTAL year Source: Financial Markets An overall improvement in liquidity conditions during the June 2017 quarter contributed to a decline in all private money market rates. The monthly averages of the interbank, overnight and 30-day private money market rates fell by 37 bps, 163 bps and 97 bps, respectively. There were also declines of 36 bps and 19 bps in the yields on the 90-day and 180-day GOJ Treasury Bill (T-Bill) to 5.77 per cent and 6.13 per cent, respectively. However, the yield on the 270-day T-Bill increased by 132 bps for the June 2017 quarter (see Figure 26). Dec-16 Mar-17 Jun-17 Qtr. Qtr. Qtr Day Figure 26: Selected Market Interest Rates OTROs Other O/N CDs * FR CDs VR CDs USD Indexed Notes BOJ Repo OMOs (Other) BOJ FX (incl. PSE) Foreign Currency Purchases Foreign Currency Sales BOJ (Other) Net BOJ (Inject/Absorb) Operations GOJ Operations Net Total (Inject/Absorb) Operations Notes: * O/N CDs reflects the average of daily changes for each quarter to represent the associated liquidity impact. The Bank opted not to issue new US dollar CDs during the June 2017 quarter despite maturities of US$26.4 million for the 3-year CD (see Table 6). This followed the March 2017 quarter when new placements were (US$MN) Rate (%) 4.2 Corridor SLF Repo 7.0 Overnight CD 30-day T-Bill day T-Bill day T-Bill day CD 30-day PMMR O/N PMMR O/N Interbank BOJ SLF Rate BOJ 30day CD BOJ O/N CD O/N PMMR O/N Int. Bank 30-day 30-day 90-day PMMR T-Bill T-Bill day T- day TBill Bill Jun Sep Dec Mar Jun Source: Notes: (i) PMMR is the private money market rate (ii) O/N is the overnight rate in the market accessible by all financial institutions while the interbank rate (I/B) is the overnight rate accessible only by banks. + Reflects average rate for the month. 17

26 Quarterly Monetary Policy Report April to June 2017 The decline in yields on the 90- and 180-day tenors of the GOJ T-Bill largely reflected the impact of increased JMD liquidity in the context of the GOJ BMI Note which matured in May Lower rates were also induced by a reduction in the BOJ policy rate in April 2017 coupled with a strong appetite for shortterm instruments early in the quarter. Reduced preference for longer tenor instruments contributed to the higher yield on the 270-day tenor of the GOJ Treasury Bill. currency outflows from authorized dealers and cambios (see Figure 28). 6 Figure 27: WASR of Select Major Currencies (e.o.p.) (12 month point-to-point) depreciation Foreign Exchange Market The weighted average selling rate of the Jamaica Dollar vis-á-vis the US dollar closed the June 2017 quarter at J$ = US$1.00, reflecting an annual rate of depreciation of 1.8 per cent, relative to 5.4 per cent at the end of the previous quarter (see Figure 27 and Figure 28). Relative to the previous quarter, the exchange rate appreciated marginally by 3 per cent. This reflected depreciation of 0.6 per cent in both April 2017 and May 2017, offset by an appreciation of 1.2 per cent in June The depreciation in April 2017 and May 2017 reflected the fastest pace since October 2016 and occurred in a context of increased demand for foreign exchange to finance portfolio investments. In response to intense and sustained pressure, the Bank provided liquidity support of US$240.5 million in May Source: Notes: + = depreciation and = appreciation also conducted a pilot sale of foreign exchange under its foreign exchange intervention and trading tool (BFXITT) (see Box 3). In the context of these developments, there was an increase in the average daily inflows into the market. For June 2017, average per diem inflows rose to US$29.4 million, relative to US$26.2 million and U$27.5 million for May 2017 and June 2016, respectively. appreciation Following the intervention sales, the exchange rate appreciated almost continuously at an average daily rate of (US$7) to end the quarter at J$ = US$1.00. This influenced a change in market participants behaviour where foreign exchange earners now demonstrated increased willingness to sell while there were reports of increased willingness among dealers/brokers to sell foreign exchange from their long positions in order to satisfy market demand. This was reflected in a reduction in net foreign At end-june 2017, there was an estimated loss of 0.6 per cent in Jamaica s external price competitiveness, as measured by BOJ s real effective exchange rate (REER), relative to the REER at end-june This real appreciation represented a reversal relative to the estimated gain of 2.1 per cent for the March 2017 quarter (see Figure 28). 7 The loss in competitiveness occurred against the backdrop of higher domestic inflation, relative to trading partners. 6 Net flows to the foreign exchange market are measured by market purchases by dealers and cambios (inflows) minus market sales by dealers and cambios (outflows). These flows exclude the inter-dealer market as well as intervention sales with the Central Bank. 7 On an annual basis, the Jamaica Dollar continued to depreciate visà-vis the US Dollar and the Canadian dollar albeit at a more tempered pace than the previous quarter. There was however, a notable increase in the rate of depreciation relative to the Euro. The Jamaica Dollar continued to appreciate against the Pound Sterling though at a more moderate pace. 18

27 Quarterly Monetary Policy Report April to June 2017 Figure 28: The Real Effective Exchange Rate (REER), WASR and Net Demand (twelve month point-to-point percentage change) % WASR REER Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Source: Notes: (i) A decline in the level of the REER (a negative change) implies an improvement in Jamaica s external price competitiveness (ii) Net demand includes foreign currency purchases and sales within the market Box 3: BOJ s New Foreign Exchange Intervention & Trading Tool Introduction In an effort to upgrade and modernize its intervention and trading framework for foreign currency, the Bank of Jamaica (BOJ), on 26 July 2017, implemented a new tool for its sale and purchase of foreign exchange (FX) to market intermediaries. 8 The framework, called BOJ Foreign Exchange Intervention & Trading Tool (B-FXITT), is a rule-based, competitive, multipleprice intervention system to buy and sell FX to Authorized Dealers (ADs) and Cambios. This new framework, which benefited from technical assistance from the International Monetary Fund and consultation with market stakeholders, is designed to enhance the effectiveness of BOJ s monetary policy and foreign exchange operations. The implementation of B-FXITT is a fundamental part of the strategy to improve the efficiency and transparency of the foreign exchange market thus providing greater assurance about the availability of foreign currency to the public. How Does B-FXITT Work? a) Under B-FXITT, BOJ will offer to sell preannounced quantities of FX to ADs and Cambios on a weekly basis. These intermediaries will be invited to submit bids to buy or sell FX from or to BOJ at a rate determined by these participants; 9 b) will sell FX to the market using two mechanisms: i. Standard Intervention Tool (SIT) Using the SIT, the Bank will sell or purchase pre-announced amounts of FX to ADs and Cambios on a weekly basis. The amount of the intervention sale will be partly determined by BOJ s assessment of the market s FX liquidity needs. ii. Flash Intervention Tool (FIT) Using the FIT, the Bank will conduct flash FX sale or purchase operations outside of the regular intervention window in circumstances of diverse market developments. The purpose of the FIT is to offset the effects of excessive volatility in the foreign exchange market. Flash interventions will be triggered by unusual 8 These intermediaries are comprised of Authorized Dealers (ADs) and eligible Cambios. 9 While the framework allows for both the sale and purchase of FX to and from the market, in the initial stages, the Bank will be using the framework for the sale of FX only. 19

28 Quarterly Monetary Policy Report April to June 2017 exchange rate volatility and/or abnormal market demand or supply; c) Each week, the Bank will announce a 4- week schedule of how much it will sell to the market at each auction; d) The sale operations will commence at 8:45 am on Wednesday of each week and close at 9:15 am; e) The rate that will result from the operation will be the weighted average of all the successful bids; f) The results of the operations will be posted by 10:00 am to the Bank s website and also sent to the press on the same day; and g) Settlement will occur on the day following the operation. How Does B-FXITT differ from BOJ s current or past intervention policies? There are four major differences between the current system of foreign exchange intervention and B-FXITT. a) Under B-FXITT the Bank will conduct weekly (pre-announced) interventions. The Bank will also conduct flash interventions if market conditions warrant. Under the previous system, all interventions were unscheduled and were only done when the Bank perceived the need to do so. b) Under the current system, the Bank sells to the ADs and Cambios at the previous day s weighted average selling rate (WASR). This is considered sub-optimal as it may enable participants to benefit from differences between the previous day s rate and the prevailing market rate. Under the new intervention policy, the Bank will invite ADs and Cambios to submit bids to purchase funds from BOJ at a rate reflective of underlying demand and supply conditions in the market. This method provides a measure of the exchange rate at which the market is willing to purchase funds thereby enhancing price discovery. c) Under the current intervention system, BOJ determines both the price and volume. For B- FXITT, only the volume will be determined by BOJ. d) B-FXITT provides a more transparent allocation strategy with clearer rules relative to what pertains under the current system. Market participants will be aware in advance of the intervention amounts. B-FXITT should not be likened to previous foreign exchange systems implemented in Jamaica. These were generally introduced during periods of chronic foreign exchange shortages. In particular: a) B-FXITT is being introduced at a time when the gross reserves of the Central Bank amounted to US$3.2 billion at end-june 2017, the equivalent of approximately 24 weeks of goods and services imports and the highest in the history of Jamaica; b) In contrast to what obtained in the 1980s, there will be no prescribed bands within which the exchange rate must fall; c) Under B-FXITT, foreign exchange trading will not be centralized at BOJ in contrast to what obtained in the 1980s; and d) Unlike the system in the 1980s, there is no exchange control under B-FXITT. Exporters and other earners of foreign exchange will not be mandated to sell BOJ foreign exchange. The impact of B-FXITT on the public a) The introduction of B-FXITT will not affect the manner or freedom with which members of the public currently purchase or sell foreign exchange from or to ADs and Cambios. Individuals and companies will continue to be free to buy or sell any amount of foreign currency they can afford or desire; b) There will be no urgency for individuals and companies to forward buy foreign currency at exorbitant prices since B-FXITT guarantees a continuous supply of foreign currency to the market; and c) Interested members of the public will receive more precise and timely information on the foreign exchange market. The impact of B-FXITT on BOJ s Operations The new intervention policy will provide significant benefits for the market and for BOJ s operations. These include: a) Increased transparency to the market and the public about BOJ s FX market intervention. 20

29 Quarterly Monetary Policy Report April to June 2017 Market players will know the exact amount being sold or purchased by the BOJ in contrast to the current system where the Bank offers to trade an undisclosed amount; b) The use of market based price signals (demand and supply conditions) to more effectively determine the exchange rate. Currently, the intervention rate is at the previous day s WASR which may not reflect the true market price on the day of the transaction; and c) The reduction of uncertainty about market liquidity which allows ADs and Cambios to better manage large client order flows that may have a distorting effect on the market. The impact of B-FXITT on the exchange rate An important feature of this tool is to ensure smooth functioning of the FX market, assure FX liquidity and reduce excess volatility in the exchange rate. 10 B- FXITT is not intended to distort the underlying FX conditions. The Bank is cognizant that demand conditions will vary from week to week, hence the mechanism is intended to encourage a flexible exchange rate that moves in both directions based on market conditions. This is in contrast to a rate that generally moves in one direction. The impact of B-FXITT on the Net International Reserves The Bank will continue to maintain adequate reserve levels and will abide by its reserve accumulation targets. The determination of the quantity of FX to sell to the market each week will take into consideration the Bank s reserves levels, medium term NIR targets and the demand/supply conditions in the market. 10 BOJ is sometimes not fully aware of a build-up of excess demand in the market until participants can no longer postpone their needs. This situation, when it occurs, can result in panic buying and multiple bids by end-users, which multiplies the signal of excess demand and results in large lurches in the exchange rate. The same entity trying to buy US$10 million that asks three different Authorized Dealers for the funds can be misread by the market as a demand for US$30 million. This is not best practice in terms of market transparency and efficiency. 21

30 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Quarterly Monetary Policy Report April to June Equities Market The equities market showed growth for the year ended June 2017, albeit at a lower rate relative to the performance for the 12-months ended March All indices on the Jamaica Stock Exchange (JSE), with the exception of the JSE select and the junior indices, recorded growth ranging between 35.0 per cent and 47.2 per cent. Of note, the JSE Main Index increased by 47.2 per cent in comparison to growth of 45.4 per cent and 25.9 per cent for the prior review period and the five year annual average, respectively (see Figure 29). Figure 29: Annual Growth of the JSE Indices (12-Month Per cent Change) JSE Main Index ALL JA SELECT Junior Market JSE Combined Index Source: Jamaica Stock Exchange The performance of the equities market was influenced by further continued positive macroeconomic developments, including continued growth in GDP, low inflation and a continued accommodative monetary policy stance These developments were complemented by increased investor interest in company listing due to the continued expansion of some of the listed entities. 13 Moreover, investments in equities continued to provide greater returns relative to foreign currency and domestic money market investments. 14 In particular, equities offered an annual average return of 47.2 per cent while GOJ global bonds offered an average return of 5.5 per cent. Additionally, the average annualized interest rate in the 30-day private money market was 5.7 per cent as at end-june 2017 (see Figure 30). Figure 30: Returns from Private Money Market, GOJ Global Bonds and Capital Gains/ (Losses) from JSE Main Index (Per cent) Source: Jamaica Stock Exchange and Bloomberg Market activity indicators for the JSE Main Index showed mixed results for the year ended June In particular, the value and the number of transactions increased by 6.7 per cent, and 8.3 per cent, respectively, relative to the growth of 13.2 per cent, and 9.2 per cent for the previous year. Meanwhile, the volume of stocks traded for the review period declined by 2.6 per cent, relative to an increase of 12.8 per cent for the previous year (see Figure 31). The positive performance of the equities market was also demonstrated in the advance to decline ratio which remained unchanged at 24:5 for the year ended June 2017, relative to year ended March Figure 31: Quarterly Change in the 12-Month Volumes, Values Traded & Number of Transactions (Main JSE Index) (Per cent) day Private Money Market Rate 12-Month Change in the Main JSE Index Weighted Average GOJ Global Bond yields and foreign currency gains (losses) Source: Jamaica Stock Exchange Volume Values traded No. of Transactions 11 Notably, there were ten consecutive quarters of GDP growth with further expansion estimated to occur for the September 2017 quarter. 12 Of note, there was an oversubscription of stock market training programmes. 13 There was approval of stock splits by Pulse investments as well as an approved stock option for senior management by the Board of Grace Kennedy. As at end-2016, the top five market capitalization companies listed on the main and junior market recorded improved company profit for the twelve-month period. 14 Returns per asset class are calculated as the 12-month point-topoint change. The return on equities is computed based on the JSE Main Index. The returns on foreign currency investment are calculated based on the weighted average bond yields of all GOJ Global Bonds. 22

31 Quarterly Monetary Policy Report April to June 2017 Stock market price appreciation continued to be broad-based and reflected the performance of stocks within five sectors. Notably, four of the seven sectors contributed to the top ten performing stocks for the review period (see Table 7). The Manufacturing and Other categories accounted for six of the top ten advancing stocks. In particular, the Other category reflected the highest average price appreciation of per cent for the year ended-june Table 7: Stock Price Appreciation and Depreciation Other Palace Amusement Supreme ventures Berger Paints (Jamaica) Kingston Wharves Seprod Limited Financial 54.5 Barita Investments Limited JMMB Group Limited National Commercial Bank Conglomerate Pan Jam Investments 36.8 GraceKennedy Limited 1.0 Depreciation Per cent Conglomerates Jamaica Producers Group Other Kingston Properties Limited -0.5 Tourism Ciboney Group Table 8: Commercial Bank Credit to the Private Sector Annual Flows (J$ mn) Jun-16 Mar-17 Jun-17 Private Sector Credit Percentage Change (%) Loans & Advances Percentage Change (%) Less Overseas Residents Add Corporate Securities (15.3) Source: ^ Data as at May 2017 (preliminary) 65.6 Sagicor Group Jamaica Declining 32.9 per cent in the March 2017 quarter (see Table 8). Much of the increase reflected the impact of a new entrant to the commercial banking sector in the March 2017 quarter. Excluding the impact of this institution, private sector credit would have grown by 11.0 per cent. Relative to GDP, the stock of private sector Per cent Pulse Investment Manufacturing For the June 2017 quarter, commercial banks credit to the private sector increased by 31.1 per cent, which was stronger than the expansion of 14.4 per cent recorded in June 2016, but lower than the growth of credit was 28.0 per cent compared with 23.0 per cent a year earlier.15 Appreciation Advancing Private Sector Credit The expansion in private sector credit was underpinned by continued improvements in domestic economic activity. An easing in BOJ s monetary policy stance also supported the continued expansion in private sector credit. As outlined in the Bank s Quarterly Credit Conditions survey for the March 2017 quarter, a continued easing in credit terms was expected in the June 2017 quarter as lenders aimed to maintain and, where possible, improve market share amidst increased competition (see Box 5: BOJ s Quarterly Credit Conditions Survey). The expansion in private sector credit for the review period reflected growth in loans and advances to both businesses and households, albeit at a slower pace relative to the previous quarter. Personal loans expanded at an annual rate of 43.5 per cent 15 GDP was calculated using the moving sum for the June 2017 quarter. This is the sum of the nominal value of three (3) quarters prior to June

32 Quarterly Monetary Policy Report April to June 2017 compared to an increase of 17.7 per cent in credit to businesses. However, this positive performance largely reflected the impact of the new commercial bank. The exclusion of this institution would have resulted in personal credit expanding at a rate of 12.2 per cent on an annual basis while business lending would have expanded by 13.6 per cent. Growth in personal credit was primarily reflected in increased demand for mortgages as well as term loans and instalment credit. The relatively slower pace of growth in credit to businesses reflected the impact of net repayments of loans outstanding to the Agriculture & Fishing sector and the Transportation, Storage and Communication sectors, which was partly offset by increased credit made available to the Electricity, Professional & Other Services, Distribution and Tourism sectors (see Table 9). Table 9: Distribution of Total Loans & Advances to the Private Sector by Commercial Banks (J$MN) Annual Flows Mar-16 Jun-16 Mar-17 Jun-17 Business Lending Percentage Change % Agriculture & Fishing ( 992.8) ( ) Mining & Quarrying ( 110.8) ( 237.9) Manufacturing Construction & Land Development Transport, Storage & Communication ( 735.0) ( ) ( 666.9) ( 408.0) ( ) Tourism Distribution ( 621.4) Electricity, Gas & Water Entertainment Professional & Other Services Loans denominated in domestic and foreign currency grew by 36.2 per cent and 11.6 per cent, respectively (see Figure 32). Of note, growth in foreign currency credit for the review quarter was mainly reflected in the Tourism sector, while the Electricity Gas & Water sector was the main driver of local currency credit. Figure 32: Growth in Private Sector Loans and Advances (12-month percentage changes) Per cent -1-2 Source: ^ Data as at May 2017 (preliminary) Figure 33: Real Growth in Private Sector Credit (12-month percentage changes) May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Total Foreign Currency Local Currency Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Household & Other Lending Percentage Change % Personal o/w Demand loans o/w Term loans o/w Mortgage o/w Installment o/w Overdraft loans ( 21.7) ( 63.5) ( 162.8) ( 6.7) o/w Insurance premiums 0.2 ( 0.7) 70.4 ( 0.8) Overseas Residents Net Lending Annual Growth 10.8% 15.2% 34.7% 31.1% Source: ^ Data as at May 2017 (preliminary) Source: ^ Estimated data as at May 2017 (preliminary) In real terms, loans extended to the private sector increased by 25.3 per cent for the June 2017 quarter, which was a moderation from the expansion of 26.2 per cent recorded in the March 2017 quarter (see Figure 33). Excluding the new entrant, real growth of 6.1 per cent was recorded, which was lower than the expansion of 11.6 per cent in the June 2016 quarter. The moderation was associated with a slight acceleration in inflation, coupled with a deceleration in nominal credit growth for the quarter. 24

33 Quarterly Monetary Policy Report April to June 2017 Box 4: Analysis of the improving Trend in Deposit- Taking Institutions (DTIs ) Non-Performing Loans for the Five Years ended December 2016 For the five-year period ended December 2016, the portfolio of non-performing loans (NPLs) for the three-sector DTI system contracted at an average annual rate of 10.4 per cent or $2.8bn (see Figure 1), reversing seven consecutive years of deterioration in credit quality from 2005 to This contraction in NPLs influenced a decline in the NPL to total loans ratio to 2.7 per cent at end-december 2016 from 6.8 per cent at end-december During the five-year review period, commercial banks NPL portfolio accounted for 73.4 per cent of the DTI system s overall NPL portfolio as at end- 2016, recording an average annual improvement of $2.0bn. This performance was followed by merchant banks and building societies with annual average improvements of $0.6bn and $0.2bn, respectively. Figure 1: Annual Growth Trend in NPLs (2012 to 2016) J$'BN % 31-DEC DEC DEC % -2.0% % -6.0% % % -11.6% -1% % -12.0% % Growth Trend in NPLs (3 MTHS & OVER) Rate of Growth in NPLs 2.0% -14.0% -16.0% -18.0% contrast to net increases in new NPLs for 2012 to 2014, which has served to accelerate the pace of improvement in NPLs (see Figure 2). For the three-year period ended December 2014, there were notable transfers to special purpose vehicles (SPVs) ($6.9bn), net write-offs to large corporate borrowers ($4.1bn) and net repayments on corporate facilities ($2.9bn). 16,17 The reduction in NPLs during the review three-year period was moderated by growth in new NPLs (largely comprises non-performing loans from the personal (nonbusiness) and SME sectors), which averaged $2.2bn per year (see Figure 2). Figure 2: Decomposition of Changes in NPLs (2012 to 2016) J$'BN DEC DEC DEC DEC DEC-16 Large corporate* repayments Other (incl. new NPLs) Transfers to SPVs Large corporate* write-offs Overall Growth Trend in NPLs *Large corporates represent corporate accounts with repayments/write-offs in excess of $0.3bn in any given month. In terms of total NPLs for the DTI sector, there was a cumulative net reduction of $13.8bn during the fiveyear review period. Notably, there was a net decline in new NPLs for 2015 and 2016 totalling $6.6bn, in Subsequently, in the two-year period ended December 2016 (i.e. post the extraordinary corporate pay-outs and transfers to SPVs), there was a reversal in the trend in new NPLs. Specifically, new NPLs 16 Sale of NPLs by a merchant bank and a commercial bank to their respective special purpose vehicles 17 Largely tourism loans at commercial banks 25

34 Quarterly Monetary Policy Report April to June 2017 recorded an annual average decline of $1.1bn. This outturn was largely attributable to: 1. Steady improvement in macro-economic conditions as evidenced in real GDP growth, improved labour market conditions and the low and stable inflation rate (see Figure 3). These positive developments facilitated real increases in income (3.3 per cent in 2016), thereby enabling persons to have more resources at their disposal to resume amortization of delinquent debt; 18 Figure 3: Trend in Select Economic Indicators (2012 to 2016) 12.0% 15.5% impact that their credit rating has on the ability to access credit. This increased access to borrower information has also enabled better credit underwriting and management by DTIs as evidenced in increases in net write-offs and net repayments (see Figure 2 and Figure 6). These developments demonstrate DTIs emphasis on, and commitment to managing the credit risks inherent in their portfolios, especially in a context where borrowers have demonstrated an increased appetite for debt 19 as well as the fact that they have access to lower cost financing (see Figure 7). Figure 4: Status of Credit Information Providers (CIPs) with Credit Bureaus 1% 8.0% 15.0% 14.5% % 4.0% 2.0% 14.0% 13.5% 13.0% % 12.5% 31-DEC DEC DEC % Real GDP Growth Inflation Rates Job Seeking Rate Growth in the Employed Labour Force Average Unemployment Rate (RHS) 12.0% No. of CIPs pulling data from Credit Bureaus No. of CIPs signed with Credit Bureaus No. of CIPs submitting data 2. Lenders having more access to borrower information by way of the increased depth within the credit bureau industry since 2014, as evidenced in the increased number of credit information providers (CIPs) accessing data (see Figure 4) and in the number of credit reports issued (see Figure 5). As a result, customers are more cognisant of the 3. An increasing trend in the term structure of DTIs loan portfolios since December Specifically, DTIs have been writing, on average, longer-tenured loans over the last two years (see Figure 8), which supports an easing of credit terms that has engendered the improved servicing of loans by borrowers. 18 See 2016 Financial Stability Report, page As evidenced in a faster rate of growth in household and corporate debt relative to real income for 2016 (12.3 per cent and 28.0 per cent, respectively vis-à-vis only 3.3 per cent for real income). (See 2016 Financial Stability Report, page 39-40). 26

35 Quarterly Monetary Policy Report April to June 2017 Figure 5: Number of Credit Reports Issued (2013 to 2016) 300 8% Figure 7: Trend in Local Currency Weighted Average Loan Rates (incl. Select Credit Categories) (2012 to 2016) Thousands 7% 250 6% 200 5% 150 4% 3% 100 2% 50 1% 0 % No. of Credit Reports issued during the year Hit Rate for CIPs ** Note: Hit Rate represents the percentage of credit report requests that are returned with a credit history. 26.0% 24.0% 22.0% 2% 18.0% 16.0% 14.0% 12.0% 1% 8.0% 31-DEC DEC DEC DEC-15 Total Local Currency Loans Interest Rate Spread Personal Credit Mortgages Commercial Credit 31-DEC-16 Figure 6: Annual Trend in Net Recoveries All DTIs Figure 8: Average Time to Maturity of Total Loans (2013 to 2016) 3.5 J$'BN Years DEC DEC DEC DEC DEC DEC DEC DEC DEC Note: Estimated maturity period during the June 2016 quarter was impacted by a large-value 1-year loan extended by one commercial bank to its financial group. 27

36 Quarterly Monetary Policy Report April to June 2017 Near- to Medium-Term Outlook for Credit Quality of DTIs Loan Portfolios It is anticipated that in respect to new loan disbursements by DTIs, interest rates will continue to remain low and the term structure of DTIs loan portfolio will continue to elongate. This is in the context of the relatively benign outlook for inflation, the expected maintenance of favourable economic conditions and the continued accommodative monetary conditions in Jamaica. This implies that borrowers average monthly loan repayments will continue to trend lower relative to prior periods, all other things being equal. These developments should translate into lower levels of delinquencies on new loan disbursements by way of borrowers reduced debt servicing obligations. Further, the sustained easing in credit terms in tandem with the continued deepening of the credit bureau industry should enable DTIs to keep the risks in the credit portfolio in check, as the shift in attitudes towards timely and consistent repayment of debt obligations becomes more entrenched. Money The continued robust growth in private sector loans was also reflected in the performance of the monetary aggregates. The 12-month point-to-point growth rate in the monetary base was 21.8 per cent at end- June 2017, relative to 15.5 per cent at end-june 2016 (see Table 10). This expansion was largely reflected in increases of 14.9 per cent and 34.5 per cent in the currency stock and commercial banks cash reserves respectively. Of note, real currency growth moderated to 10.1 per cent from 14.5 per cent in the June 2016 quarter. Regarding the sources of change in the monetary base for the June 2017 quarter, there was an increase of $74.1 billion (US$351.7 million) in the net international reserve (NIR), the impact of which was partially offset by a contraction of $47.8 billion in the net domestic assets (NDA) (see Table 10). The increase in the NIR was associated with inflows from foreign currency surrenders and net prudential reserves, the impact of which was partly offset by GOJ debt payments, net market sales through the intervention window and repayments on BOJ Certificates of Deposits in the months of April and June A build-up in the stock of OMO liabilities Table 10: Operating Targets Stock Flow Jun-16 Mar-17 Jun-17 Qtr o- Qtr Y-o-Y NIR (US$MN) 2, , ,616.8 (152.4) NIR(J$MN) 259, , ,826.3 (19,437.0) 74, Assets 323, , ,393.5 (17,635.6) 83, Liabilities (63,609.9) (70,765.8) (72,567.2) (1,801.4) (8,957.2) Net Domestic Assets - Net Claims on Public Sector - Net Credit to Banks -Open Market Operations (139,037.8) (213,802.5) (186,807.0) 26,995.5 (47,769.2) 147, , , , ,245.4 (28,951.1) (55,861.0) (59,333.2) (3,472.2) (30,382.1) (50,050.1) (51,835.4) (87,050.2) (35,214.8) (37,00) - Other (208,012.3) (224,565.5) (221,644.7) 2,920.8 (13,632.5) -o/w USD FR CDs (89,862.3) (89,676.0) (85,871.5) 3, ,990.8 Monetary Base 120, , , , , Currency Issue 79, , , , , Cash Reserve 40, , , , , Current , , Account Source: 28

37 Quarterly Monetary Policy Report April to June 2017 in the context of the Fixed Rate 7.5% Benchmark Investment Note which matured in May 2017 contributed to the contraction in the NDA. The annual growth in broad money (M2J) increased to 22.8 per cent for the review quarter, compared with an expansion of 12.5 per cent as at June The increase over the review period reflected growth of 24.8 per cent in local currency deposits an acceleration when compared to an increase of 10.3 per cent at end-june This stronger expansion in local currency deposits primarily reflected an increase of 34.9 per cent in commercial banks savings deposits, which was supported by moderate growth in demand and time deposits by 15.7 per cent and 8.8 per cent, respectively. However, much of this increase mirrors the impact of the new entrant. Excluding this effect, M2J would have expanded by 12.8 per cent. At end-june 2017, broad money supply, relative to GDP, was 21.7 per cent, compared with 18.3 per cent at end-june The measure of broad money supply that includes foreign currency deposits (M2 * ) also recorded stronger annual growth of 21.1 per cent (11.1 per cent after excluding the impact of the new entrant). This expansion compares with growth rates of 17.8 per cent and 21.5 per cent at end-june 2016 and end- March 2017, respectively. The increase over the review period reflected growth of 14.4 per cent in foreign currency deposits denominated in United States dollars (11.1 per cent excluding the new entrant), a moderation from the expansion of 16.5 per cent as at June Resulting from the slower growth in foreign currency deposits, coupled with a faster pace of growth in total deposits, the deposit dollarization ratio for commercial banks, trended downwards to 46.3 per cent as at June 2017 from 48.3 per cent and 46.1 per cent at June 2016 and March 2017, respectively. Box 5: Quarterly Credit Conditions Survey Overview s survey indicated that credit conditions in the financial system continued to ease during the March 2017 quarter, relative to the previous quarter (see Figure 1). This easing was partly driven by increased competition in the banking sector, emanating from the entry of a commercial bank in February The increased competition had the effect of lowering the weighted average lending rate to per cent from per cent in the December 2016 quarter. This outturn reflected the statistical result of the inclusion of the new commercial bank with a large loan stock at relatively lower interest rates. Lenders also offered more competitive rates in an effort to maintain and possibly increase market share. Without the impact of the new entrant, the weighted average lending rate would be 16.1 per cent as at March In addition to lower lending rates in the system, other credit terms also improved as lenders tried to increase their market share while maintaining the quality of their loan portfolios in the more competitive market. Notwithstanding the overall improvement in credit conditions, the moderation in credit terms relative to the December 2016 quarter reflected the impact of weaker credit demand, particularly for secured credit. However, this tepid demand for credit is expected to be short-lived as March quarters are generally characterized by borrowers exercising caution in undertaking additional credit as they await the annual Government of Jamaica (GOJ) budget presentation. The outlook for the June 2017 quarter is for continued easing in credit conditions, albeit at a slower pace, relative to the March 2017 quarter. Lenders reported optimism about the performance of Jamaica s macroeconomy while the more competitive financial landscape is expected to continue influencing their loan strategies. Credit Supply Credit supply in the March 2017 quarter continued to expand but a slower pace than the previous quarter as reflected in a moderation in the Credit Supply Index (CSI) to from in the previous quarter (see 29

38 Quarterly Monetary Policy Report April to June 2017 Figure 2). This moderation was primarily due to a slowdown in the rate of growth in credit to micro businesses. Notwithstanding, institutions willingness Figure 2: Credit Supply Indices to provide credit continued to be primarily driven by 110 improved macroeconomic conditions and a more competitive market. As such, market share objectives 108 remained a key factor influencing the expansion in credit supply during the quarter The availability of local currency credit to both businesses and individuals remained fairly robust, 102 despite one institution s reference to tight liquidity conditions that posed a challenge during the quarter. Of note, the pace of expansion in foreign currency 100 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17* credit made available was similar to that reported in the previous quarter. Credit to businesses Personal credit Credit Supply Index (CSI) Figure 1: Index of Credit Conditions Source: s Quarterly Credit Conditions Survey Notes: (i) *-Expectations for the upcoming quarter indicated by respondents in the previous survey and (ii) Indices greater than 100 indicate an increase in the variable while an index less than 100 indicates a decline Secured Credit Overall Credit Terms Unsecured Credit Expectations Source: s Quarterly Credit Conditions Survey Notes: (i) The asterisk (*) represents forward looking expectations provided by the respondents for the December 2016 quarter. (ii) The index is the average response for changes in eight credit terms reported in the Credit Conditions Survey. (iii) An index greater than 100 indicates an easing of credit conditions while an index below 100 indicates a tightening of market conditions. The proportion of credit allocated to businesses continued the trend increase observed since the December 2015 quarter. This share rose to 48.0 per cent in the March 2017 quarter from 45.0 per cent in the previous survey (see Figure 3). Personal loans continued to account for the greater proportion of credit but moderated to 52.0 per cent from 55.0 per cent in the previous quarter (see Figure 3) Lending to large businesses continued to dominate credit allocated to businesses, albeit at a slower pace relative to the previous quarter. This moderation in credit to large businesses largely reflected a redistribution of credit to the micro, small and medium sized enterprises (MSME) sector. Credit to that sector as a proportion of the total stock of loans outstanding for FY2016/17 increased to 4 per cent from 35.0 per cent for FY2015/16. However, some of this improvement was attributed to the inclusion of a new participant in the survey that lends a significant amount to medium-sized businesses. For the June 2017 quarter, lenders plan to augment credit made available to prospective borrowers for both business and personal purposes. This outlook was premised on creditors plans to maintain or increase market share, particularly in the context of a new entrant in the banking sector. Much of this competition was expected to be observed among commercial banks in the provision of unsecured credit via credit cards with competitive rates to individuals. 30

39 Quarterly Monetary Policy Report April to June 2017 Credit Demand Growth in credit demand, as measured by the Credit Demand Index (CDI), was relatively muted in the March 2017 quarter (see Figure 4). approximately 183 basis points (bps) to 13.8 per cent, relative to the previous quarter (see Table 1).21 This was underpinned by a reduction of 233 bps to 12.8 per cent in loan rates to businesses, which was This marginal expansion in credit demand was reflected in a significant moderation in the index to from in the previous quarter and was related to slower growth in demand for both personal and business purposes. Lenders reported that this Figure 3: Distribution of Private Sector Loans phenomenon was generally characteristic of March quarters, the period during which the GOJ tables its budgeted estimates of expenditure for the year. The tepid growth in the demand for local currency business loans was underpinned by a contraction in demand for credit from the Mining & Quarrying, Distribution, Manufacturing and Entertainment sectors. In contrast, there was strong demand for foreign currency loans from the Construction, Tourism and Distribution sectors, as the stability in the exchange rate during the review quarter made it more feasible for businesses to borrow in foreign currency. Credit demand continued to be driven by factors such as increased business activities, loan promotional activities, lower interest rates and developments in various economic sectors.20 For the June 2017 quarter, lenders indicated that they anticipated an improvement in credit demand from both individuals and businesses. The CDI was consequently projected to rise to from 101.5, with the anticipated expansion associated with an increase in the demand for credit cards and motor vehicle loans by individuals. Increased demand for both local and foreign currency loans was also expected from large firms borrowing to finance developments in the Distribution, Construction and Tourism sectors. Price of Credit Based on the survey responses, indicative average interest rates on new local currency loans fell by 20 Developments in one or more economic sectors refers to the extent of credit demand associated with technological or market developments, foreign and/or local investments and/or other business activities. Source: s Quarterly Credit Conditions Survey Notes: Figure 3 shows the distribution of credit between households and businesses. Credit to businesses was further disaggregated to show total business loans distributed to firms of various sizes. 21 Average interest rates are calculated using a simple average calculation on 𝑖 +𝑖𝑙 +𝑖𝑚 +𝑖𝑠 +𝑖𝑚𝑖 interest rates across the five (5) categories: ( 𝑝 5 ) 31