January to March 2017 Volume 17 Number 4

Transcription

1 January to March 2017 Volume 17 Number 4

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3 Overview During the March 2017 quarter, the maintained its signal interest rate at 5.0 per cent. However, the standard interest rate on the overnight Standing Liquidity Facility (SLF) was adjusted downward to 7.0 per cent from 7.25 per cent and the interest rate on the overnight certificate of deposit (CD) instrument was increased to 4.0 per cent from 3.0 per cent. These adjustments were aimed at narrowing the width of the Bank s interest rate corridor to 300 basis points (bps) from 425 bps on 02 March 2017, which should result in a strengthening of the signalling effect of monetary policy actions. During the review quarter, the Bank also reduced the issue frequency of the 30-day CD to once per week from twice per week during the previous quarter. Ultimately, the Bank will add the 30-day CD to its suite of auctioned instruments and transition to the overnight tenor as its policy rate. Annual inflation was 4.1 per cent at March 2017, relative to 3.0 per cent for the corresponding period in The outturn was marginally below the lower end of the Bank s forecast range of 4.5 per cent to 6.5 per cent for FY2016/17 and largely reflected higher costs for energy & transport, domestic agriculture commodities and processed foods. Core inflation remained unchanged at 2.3 per cent in the March 2017 quarter. The persistently low level of core inflation is attributable to the lower exchange rate pass-through to domestic prices coupled with continued fiscal restraint. For FY2017/18, inflation is projected within the range of 4.0 per cent to 6.0 per cent. This forecast is based on 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 considered to be balanced. The Jamaican economy continued to grow in the March 2017 quarter, registering the ninth consecutive quarter of expansion. Growth in real value added for the review quarter is estimated to be within the range of 0.0 per cent to 1.0 per cent. With the exception of Mining & Quarrying and Producers of Government Services, all industries are estimated to have grown. 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 and Hotels & Restaurant as well as Agriculture and Forestry & Fishing. Over the next four quarters, the economy is expected to benefit from continued recovery in major industries and the materialisation of several growth-inducing initiatives, driven by increased investor confidence and investment activities. Jamaica s growth prospects should be bolstered by continued improvements in external competitiveness as a result of the structural and macroeconomic reforms been undertaken under the IMF Stand-By Arrangement (SBA). This three-year precautionary SBA 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 8 Advanced Economies 8 International Financial Markets 10 Commodity Prices The Implications for the Jamaican Economy 11 Box 3: A Review of the Performance of Government of Jamaica Global Bonds Jamaican Economy Real Sector Developments 16 Aggregate Supply 16 Aggregate Demand 19 Real Sector Outlook Monetary Policy, Money and Financial Markets 20 Monetary Policy 20 Financial Markets 21 Foreign Exchange Market 22 Box 4: BOJ Signals Upgrade of FX Market Operations 23 Equities Market 25 Private Sector Credit and Lending Rates 26 Money 28 Box 5: Credit Conditions Survey 30 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 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 Agricultural Raw Materials Index 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

8 JSE 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 Jamaica Stock Exchange 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 ` January to March Inflation Annual inflation was 4.1 per cent at end-march 2017, below the target range of 4.5 per cent to 6.5 per cent for FY2016/17. This outturn represented an acceleration, relative to the 1.7 per cent inflation rate recorded at end-december 2016, which largely reflected increases in all components of inflation, in particular, energy & transport costs and domestic agricultural prices. The Bank is forecasting inflation within the range of 4.0 per cent to 6.0 per cent for FY2017/18 in the context of a projected increase in domestic demand. In addition, international commodity prices are expected to remain at tempered, though increasing levels. The risks to the forecast are assessed to be balanced over the next four quarters. Inflation Developments Annual headline inflation in Jamaica accelerated to 4.1 per cent at March 2017 from 1.7 per cent and 3.0 per cent at December 2016 and March 2016, respectively. The uptick in inflation partly reflected the impact of base effects arising from the deflation that occurred in the March 2016 quarter. In this context, the acceleration largely reflected the impact of higher energy & transport and domestic agricultural prices prices (see Figure 1 and Box 1). Notwithstanding, headline inflation for FY2016/17 was below the target range of 4.5 per cent to 6.5 per cent. Looking ahead, inflation is expected to fall within the range of 4.0 per cent to 6.0 per cent over the next four quarters. Core inflation (inflation emanating from consumer price increases, excluding the influence of agriculture and energy prices) was unchanged at 2.3 per cent at March 2017 when compared to the same measure at December 2016 (see Table 1). This outturn followed nine previous consecutive quarters of deceleration. This deceleration in core inflation is consistent with tight demand conditions, brought on in part by continued fiscal restraint, which fostered a lower exchange rate pass-through to domestic prices. The point-to-point measure of domestic agriculture prices increased after two successive quarters of decline. This increase largely occurred in the context of a base effect adjustment arising from the deflation in agricultural prices in the March 2016 quarter. Additionally, excess rainfall which resulted in some damage to crops supported the acceleration in agricultural price increases. Notwithstanding, agricultural supplies remained fairly buoyant during the quarter (see Figure 2). Table 1: Inflation and Major Components (Annual point-to-point per cent change) Headline Core * FNB ** HWEG ** Mar Jun Dec Mar Target FY2016/17: 4.5 to 6.5 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 ` January to March 2017 Figure 1: Component Contributions to Inflation (Annual point-to-point per cent change) Agriculture (8.0%) Energy & Transport (20.0%) Processed (30.8%) Services (Other) (36.1%) Durables (5.1%) Inflation percent (%) Source: STATIN & BOJ Inflation for processed food items increased marginally for the review quarter after nine consecutive quarters of deceleration. This outturn reflected the impact of higher wheat prices during the quarter (see International Developments section and Figure 3). 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 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 0 Source: RADA Carrot Cabbage Red Peas Onion Tomato (Plummie) Escallion & Thyme Callaloo Pak-choy Pumpkin 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 Dec-16 Mar-17 Yellow Yam Ripe Plantains Negro Yam Sweet Potato Dasheen 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 Dec-16 Mar-17 5, ,000 Inflation stemming from other services increased moderately for the review quarter after four successive quarters of deceleration. 1 This increase partly reflected the second round effect of higher oil prices coupled with the lagged, albeit weak impact of exchange rate pass-through to domestic prices. In the past, inflation for other services reflected a strong 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 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 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-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 % 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 Dec-16 Mar-17 Source: A positive correlation with processed food inflation and other services inflation (non-energy related) has been observed. With respect to non-energy related services there was a correlation of 0.72 at a lag of four quarters. When matched against inflation from processed foods, exchange rate depreciation reflects its largest correlation of 0.56 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 ` January to March 2017 Energy and transport prices rose for the second successive quarter. This was mainly underpinned by the lagged effect of an uptick in crude oil prices (see Figure 5). Figure 5: Energy Price Indices (Base year = March 2008) Source: Inflation Outlook & Forecasts Inflation for FY2017/18 is within the 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 four quarters, stemming from the impact of the FY2017/18 tax measures, improved demand conditions and increases in crude oil prices. Fuel (JPS) Kerosene WTI Petrol Diesel 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 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 The Bank estimates that economic growth for the review quarter was largely in line with potential (see Figure 7). The Non-Accelerating Inflation Rate of Unemployment (NAIRU) gap was generally unchanged in the March 2017 quarter, relative to the previous quarter, indicating the absence of inflationary pressures from the labour market. 2 This is in the context of the unemployment rate continuing to exceed the NAIRU. In light of the aforementioned, it is assessed that there is limited inflationary pressure building in the real economy. Figure 7: Output Gap and Gap between Unemployment and NAIRU 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 Dec-16 Mar-17 NAIRU (Gap) Output Gap (RHS) The above chart presents the output gap, the gap between actual output and potential, and the NAIRU gap, the gap between Unemployment and the Non-Accelerating Inflation Rate of Unemployment (NAIRU). When output is below potential (negative output gap) inflationary pressures are negative due to economic slack. When unemployment exceeds the NAIRU (positive NAIRU gap), there is also slack in the labour market contributing to low wages and by extension, low inflationary pressures. Source: Figure 6: Inflation Performance (Annual point-to-point outturn for each fiscal year) Inflation (Actual & Forecast) Target Range 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 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-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. 2 The non-accelerating inflation rate of unemployment (NAIRU), better known as the natural rate of unemployment, is the rate of 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, notwithstanding a moderate uptick in the February 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: BOJ s 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. unemployment that is consistent with the long run rate of inflation in the absence of supply shocks. The NAIRU gap is the difference with actual nemployment level. 3

12 Quarterly Monetary Policy Report ` January to March 2017 Inflation Risks The risks to inflation for the next four quarters are considered to be balanced (see Figure 8). The upside risks (higher inflation) take into account the possibility of higher than projected exchange rate depreciation and pass through, worse than anticipated weather conditions, stronger than anticipated domestic demand, as well as higher than expected global grains and oil prices. Growth in the monetary aggregates also suggests a moderate upside risk to inflation (see Section 3.2.6, Money). In contrast, the downside risks (lower inflation) include the possibility of lower than projected international commodity prices, weaker than anticipated demand conditions as well as better than anticipated impact of the developments in domestic agriculture supply. Figure 8: Inflation Fan (Annual point-to-point forecast) 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 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 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 modeled as both adaptive (backward-looking) and rational (forwardlooking) (see Phillips curve equation below). 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-december 2016, the results from the model suggests that the increase in inflation in the March 2017 quarter mainly reflected the reversal of the impact of favourable supply shocks (see Figure below). In addition, inflation expectations increased while imported inflation remained unchanged, relative to the previous quarter. This was partly offset by moderately weak demand conditions as the output gap is estimated to have remained slightly negative during the quarter. Component Contribution to Inflation Phillips Curve Source: 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. 4

13 Quarterly Monetary Policy Report ` January to March 2017 The Bank s model was re-estimated in April 2017 taking into account the inflation outturn for March Inflation at end-june 2017 is projected to increase as domestic demand conditions improve. In particular, the output gap is expected to continue to narrow relative to the previous quarter in the context of an anticipated increase in aggregate expenditure. This is expected to be partly offset by a moderation in imported inflation. Inflation expectations are projected to remain largely unchanged. Box 2: Businesses Inflation Expectations Survey February 2017 Overview Results from the February 2017 Businesses Inflation Expecttions survey revealed an increase in the expectation for inflation 12 months ahead, relative to the December 2016 survey. Consistent with this view, there was a moderate decline in the Perception of Inflation Control. With regards to the exchange rate, respondents expected a slower pace of depreciation over all three time horizons relative to the previous survey 3. The majority of businesses surveyed believed that the Bank s OMO rate will remain the same over the next three months. The Index of Present Business Conditions improved relative to the December 2016 survey, while the Future Business Conditions Index declined marginally. For the past four years, both indicators have been on an upward trend. Inflation Expectations In the February 2017 survey, the expected inflation for CY2017 was 2.0 per cent compared to the outturn of 1.7 per cent for CY2016. This expectation was below the annual p-t-p inflation of 3.6 per cent at February Similarly, respondents expectation of inflation 12 months ahead rose to 4.1 per cent, relative to 3.3 per cent in the December 2016 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? 17% 15% Inflation Mov. Avg (3 months) Inflation Expected (12 months ahead) Actual Inflation (12-month p-t-p) 13% 11% 9% % 5% 3% % Feb-12 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 Source: Businesses Inflation Expectations Survey 3 3-Month, 6-Month and 12-Month. 5

14 Quarterly Monetary Policy Report ` January to March 2017 Perception of Inflation Control The index of inflation control moderated to in the February 2017 survey from in the December 2016 survey (see Figure 2). This outturn reflected a decline in respondents who were very satisfied accompanied by a marginal increase in the respondents that were dissatisfied with the authorities control of inflation. Interest Rate Expectations 4 The majority of respondents expected the Bank s OMO rate to remain unchanged. Similarly, the expected 180-day Treasury Bill (T-Bill) yield, three months hence, is expected to remain unchanged at 6.4 per cent relative to the December 2016 survey. Figure 2: Perception of Inflation Control Question: How satisfied are you with the way inflation is being controlled by the Government? Per cent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Very Satisfied Satisfied Neither Dissatisfied Very Dissatisfied Index Perception of Present and Future Business Conditions In the February 2017 survey, the perceptions of present business conditions improved, whereas the perceptions of future business conditions fell slightly. Notwithstanding, more than 50.0 per cent of the respondents continue to think future conditions will be better. For the past four years, both indicators have been on an upward trend (see Figures 3 and 4). 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? % Feb-15 Apr-15 May-15 Jul-15 Aug-15 Sep-15 Oct-15 Dec-15 Feb-16 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 Apr-16 May-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb (J$million) Exchange Rate Expectations Relative to the December 2016 survey, respondents expected a slower pace of depreciation in the exchange rate over all time horizons (see Table 1). The February results reflected the lowest level of expected depreciation since the May 2013 survey. Table 1: Exchange Rate Expectations 50 0 Present Business Conditions Real GDP (Annualized) Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Dec-16 Source: Businesses Inflation Expectations Survey Question: In January 2017 the exchange rate was J$ = US$1.00. What do you think the rate will be for the following time periods ahead, 3-month, 6-month and 12- month? Periods Ahead Expected Depreciation (%) Sept-16 Oct-16 Dec-16 Feb-17 3-Month Month Month Source: Businesses Inflation Expectations Survey. Note: The responses have been converted to percentage change. 4 Question: In January 2017 the 180-day T-bill rate was 6.23 per cent. What do you think the rate will be for the next 3 months and 6 months? 6

15 Quarterly Monetary Policy Report ` January to March 2017 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) (J$million) 0 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 Dec Source: Businesses Inflation Expectations Survey Note: Rates on foreign currency personal loans were not collected. Expected Increase in Operating Expenses Relative to the views expressed in the December survey, respondents indicated that they expect 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 fuel/transport 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? 5 Oct-16 Dec-16 Feb-17 Utilities Wages/Salaries Fuel/Transport Stock Replacement Raw Materials Other Not Stated Source: Businesses Inflation Expectations Survey 5 The 3-Month, 6-month and 12-month horizons. 7

16 Quarterly Monetary Policy Report January to March International Economy For the March 2017 quarter, global economic growth is estimated to have tempered relative to the Bank s previous forecast as well as the outturn for the December 2016 quarter. This was primarily underpinned by an estimated, temporary, deceleration in consumption spending in the US. An anticipated increase in the US Fed Funds rate materialize during the quarter. Concurrently, speculation that President-elect Donald Trump will pursue more growth-oriented policies dissipated and fostered bouts of depreciation of the US dollar against a number of currencies. The equities markets in the US however continued to grow strongly. Economic activity in the UK continue to expand moderately, with strong performance in the services industries offsetting declines in other industrial groups. The UK economy has not yet reflected any adverse impact from the Brexit vote. While the British Government triggered Article 50 towards the end of the quarter, this is not expected to have a material impact on GDP in Notably there was increased demand for risky assets as well as a number of sovereign bond investments given the recovery of commodity prices during the quarter. Against this background, foresees 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 March 2017 quarter is estimated to be lower than previously forecast. This outlook is underpinned by a weaker than expected pace of growth in the US as a result of a deceleration in consumption spending. Notwithstanding this development, global growth for 2017 is expected to be unchanged from the previous forecast of 3.2 per cent given improved forecasts Table 2: Overview of Selected Variables (Per cent) GDP Actual Current Forecast Previous Forecast as at 24 Jan 17 World USA Canada Japan UK Euro China Inflation USA Canada Japan UK Euro China Source: (BOJ) and Bloomberg for a number of other countries (see Table 2 and Figure 9). Figure 9: Global Economic Growth World Growth (BOJ) USA Source: United States of America (USA) Real output growth for the US in the March 2017 quarter is estimated to have moderated to 1.8 per cent, following an expansion of 2.1 per cent in the previous quarter. This is also a weaker pace of growth than the Bank s previous estimate of 2.0 percent. During the review quarter, growth in 8

17 Quarterly Monetary Policy Report January to March 2017 consumption spending is estimated to have decelerated. The impact of this was partly offset by expansions in the manufacturing and services sectors. Of note, there was an increase in consumer confidence while the unemployment rate fell to a near ten year low of 4.5 per cent in March 2017 (see Table 3). Table 3: Unemployment Rate for Selected Economies (Quarterly Average Per cent) USA Canada Euro Mar Jun Dec Mar * 9.6 * Source: Official statistics offices, *Bloomberg Consensus forecasts In this context, on 15 March 2017, the Federal Reserve Open Market Committee (FOMC) voted to increase the US Fed Funds target range by 25 basis points (bps) to 1.00 per cent (see Figure 10). 2 Figure 10: Policy Interest Rates, monthly data (Per cent) Mar-2013 Jun-2013 Sep-2013 Source: Bloomberg 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 USA UK Euro area Canada Japan China (RHS) estimates that the US economy will expand by 2.0 per cent for 2017, down from its previous forecast of 2.3 per cent. Notably, the Federal Reserve at its March 2017 policy meeting maintained its projection for 2017 at 2.1 per cent. This downward revision to the Bank s projection mainly reflects the impact of a slower pace of growth in consumption spending. Government spending in the US is also anticipated to be lower than projected over the next four quarters, due to revised views about President Donald Trump s ability to institute the proposed tax and infrastructure reforms 1. The Bank is projecting quarterly growth in the US to be within the range of 1.8 per cent to 2.5 per cent over the next four quarters. At end-march 2017, inflation in the USA accelerated to 2.4 per cent, from 2.1 per cent at end-december For the next four quarters, the Bank projects US inflation on average to remain above the Fed s 2.0 per cent long run target. United Kingdom (UK) The UK economy is estimated to have expanded by 2.3 per cent for the March 2017 quarter, a faster pace of growth when compared to the previous quarter s expansion of 2.0 per cent. This was also a better performance relative to the Bank s previous forecast of 1.9 per cent. The estimated expansion was underpinned by favourable leading indicators which pointed to continued improvements in the services sector of the British economy. On 29 March 2017, the UK triggered Article 50 of the Lisbon Treaty, which commenced the legal process of the UK exiting from the European Union 3. Uncertainties remain in relation to the implications of the UK s exit from the EU. 4 However, the Bank has revised upwards its growth projection for 2017 to 1.7 per cent on account of the stronger than expected performance to date. Over the next four quarters, growth in the UK is likely to slow as the 1 This follows the failure to repeal and replace the Affordable Care Act. 2 The FOMC updated its dot plot which indicated that policy makers are anticipating two additional rate hikes in 2017, consistent with the three predicted in their previous forecasts in December The negotiating process must end within two years and discussions will cover the areas of education, immigration, healthcare and trade. A white paper was also tabled on 30 March 2017 to bring forward legislation that will repeal the Act of Parliament, the European Commission Act 1972 that gives effect to EU law in the UK. 4 On 03 November 3, 2016, the UK High Court ruled that the British Parliament must give its approval before the UK can formally begin the process of withdrawal from the European Union (EU). Parliament gave its approval on March 13,

18 Quarterly Monetary Policy Report January to March 2017 process to trigger Article 50 begins, signalling Britain s official exit from the EU. Canada Economic expansion in the Canadian economy for the March 2017 quarter is estimated to have tempered to 2.2 per cent, when compared to the outturn of 2.6 per cent for the December 2016 quarter. This estimate however reflects an improvement when compared to the previous forecast of 1.9 per cent in the context of robust household consumption and a rebound in investment spending. For the next four quarters, the projection is for GDP growth in Canada to be in the range of 2.0 per cent to 2.2 per cent. International Financial Markets The demand for select sovereign bonds was mixed over the March 2017 quarter. Relative to the December 2016 quarter, the average yields on the JP Morgan Emerging Market Bond Index (EMBI+) and GOJ Global Bonds (GOJGB) declined by 27 bps and 30 bps to 5.83 per cent and 5.75 per cent, respectively, while the average yield on the US Treasuries increased by 10 bps 1.76 per cent (see Figure 11). The spreads between GOJGBs and USTBs, GOJGBs and EMBI+ as well as the EMBI+ and USTBs narrowed by 39 bps, 2 bps and 27 bps, respectively, to 3.99 per cent, per cent and 3.30 per cent. Figure 11: Selected Average Sovereign Bond Yields (Per cent) Mar-13 Sep-13 Mar-14 Source: Bloomberg Sep-14 Mar-15 Sep-15 Mar-16 Mar-17 Sep-17 Mar-18 EMBI+ GOJGB US Treasuries (RHS) The lower yields on emerging market bonds mainly reflected confidence in the growth prospects of these economies given increases in commodity prices. However, the higher yields on US Treasuries primarily emanated from the market s expectation of an impending interest rate increase by the Fed and a possibly more aggressive pace of future increases. Equities continued to perform strongly during the March 2017 quarter. There was a general rise in selected stock market indices during the quarter as investors appetite for riskier assets increased. Compared to the December 2016 quarter, the Dow Jones Industrial Average (DJIA), S&P 500, FTSE 100 and the Eurofirst 300 advanced by 4.6 per cent, 5.8 per cent, 2.5 per cent and 5.2 per cent, respectively. On a yearly basis the DJIA, S&P 500, FTSE 100 and the Eurofirst 300 increased by 16.8 per cent, 15.0 per cent, 18.6 per cent and 13.3 per cent, respectively (see Figure 12). As it relates to European equities, the gains in the FTSE 100 stemmed from a weaker pound sterling which led to higher profits for foreign companies. The outturn for the Eurofirst 300 reflected investor s expectation of continued stimulus measures through the European Central Bank s bond purchasing programme. Figure 12: Selected Stock Market Indices (Year over-year Per cent) Source: Bloomberg DJIA Eurofirst 300 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 Commodity Prices S&P FTSE Commodity prices reflected a general increase during the review quarter. The average West Texas 10

19 Quarterly Monetary Policy Report January to March 2017 Intermediate crude oil price increased by 55.2 per cent and 5.3 per cent on an annual and quarterly basis, respectively. At end-march 2017, the price of crude oil on the international market was US$50.60 per barrel. In addition, average grains prices increased by 3.5 per cent on an annual and quarterly basis (see Figure 13). Figure 13: The Bank s Price Indices for Imported Commodities Fuel Sub-Index Agricultural Raw Material Index and quarterly rate of 13.2 per cent and 1.8 per cent, respectively for the quarter. Average wheat prices declined at an annual rate of 12.9 per cent but increased at a quarterly rate of 6.1 per cent. Average aluminium prices for the review quarter recorded growth of 22.4 per cent and 8.5 per cent, relative to the corresponding quarters of March 2016 and the December 2016, respectively. This outturn largely reflected speculation that there will be a falloff in Chinese production in order to reduce air pollution. Aluminium prices were also influenced by a decline in inventories at London Metal Exchange approved warehouses 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 Sep-2017 Dec-2017 Mar-2018 Sources: Bloomberg, World Bank and BOJ The increase 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) and non-opec members had been more than 90.0 per cent compliant with the accord to curtail excess production in January 2017 and (b) a possible extension of the deal beyond its June 2017 end date. Notwithstanding the increase in prices for the quarter, prices fell in March because of heightened concern about the effectiveness of OPEC s strategy to curb global supplies following the release of US government data which showed continued increases in US fuel inventories and drilling activity. The increase in average grains prices reflected higher prices for corn and soybean, the impact of which was partly offset by declines in wheat prices. The price increases was broadly underpinned by growing demand for grains in China, Russia as well as Latin and South America. The average price of corn increased at an annual rate of 0.4 per cent and a quarterly rate of 5.5 per cent, reflecting increased interest in the use of the crop to produce biofuels. Likewise, average soybean prices rose by an annual Based on the outlook for increased global supplies the risks to commodity prices over the next four quarters are skewed to the downside. Therefore, the Bank anticipates a slower rise in commodity prices relative to the previous forecast. The Implications for the Jamaican Economy Jamaica s Terms of Trade Index (TOT) contracted at an annual pace of 28.5 per cent for the March 2017 quarter, in contrast to the annual expansion of 0.8 per cent registered for the December 2016 quarter. This outturn reflected a decline of 15.8 per cent in the Export Price Index (EPI) and a rise in the Import Price Index (IPI) by 17.7 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 fuel, capital goods and non-durable raw materials. Over the next four quarters, the Bank expects that Jamaica s TOT will improve. This mainly reflects an improvement in the EPI as a result of an expected increase in implicit tourism prices, consistent with the Bank s forecast of higher global growth. 5 Inventories have declined by approximately 20.0 per cent since the start of the year. 11

20 Quarterly Monetary Policy Report January to March 2017 Box 3: A Review of the Performance of Government of Jamaica Global Bonds Introduction The Goverrnment of Jamaica s Global Bonds (GOJGBs) have performed remarkably in recent years. The average yields on these global bonds as well as the spreads between these yields and benchmarks, such as the J.P. Morgan s Emerging Market Bonds Index Plus (EMBI+) and US Treasuries, have fallen to record low levels. This performance suggests that the macroeconomic reform initiatives underway in Jamaica are viewed favourably by the international capital market (ICM). These indicators are of interest to the Bank as they provide useful information about investors perception of sovereign risk (how investors view the probability of an adverse credit event). Against this background, this box reviews the trends in GOJ Global bond prices and spreads, outlines some of the reasons for this performance and highlights factors that are likely to have an impact on future bond spreads for Jamaica. GOJ Global Bond Stylised Facts The Government of Jamaica issued its first global bond on the ICM in Subsequently, eighteen bonds were issued, of which eleven are outstanding at March 2017 (see Table 1). 6 As at end-march 2017, the total stock of GOJGBs outstanding was US$5.6 billion, or approximately 55.1 per cent of total external debt.these are all denominated in US dollars. Abstracting from the bond that matures in 2017, the tenors of these GOJ liabilities range between 2 and 30 years. The average duration and average term to maturity on these bonds are 6.3 years and 17.5 years, respectively. The coupons on the bonds range between 5.25 per cent and per cent compared with the current ask yields at the end-march 2017 which range between 2.91 per cent and 6.67 per cent. 7 Table 1:Government of Jamaica Global Bonds Jamaica Global Bonds Is s ue Date M aturity Date Source: Bloomberg Data as at 31 March 2017 Coupon Bid As k As k Y ield Jun Jun Jun Jun Feb May Jul Nov Dec Jan Oct Oct Jul Jul Jul Apr Feb Feb Mar Mar Jul Jul The sovereign credit ratings for Jamaica compares favourably to some Caribbean economies. For example, the credit ratings for Barbados as at March 2017 was CAA3 and CCC+ from Moody s and Standard & Poor's (S&P), respectively. The rating for Jamaica s main Caribbean trading partner, Trinidad & Tobago, was, however, BA1 and BBB+ from Moody s and S&P, respectively. S&P credit rating for Jamaica as at end-march 2017 was B with a stable outlook. Moody's credit rating for Jamaica was B3 with stable outlook while Fitch's credit rating for Jamaica was last reported at B with a stable outlook (see Table 2). Jamaica s credit rating is mainly driven by its high debt stock. However, since 2014, the country has received steady upgrades in a context of (i) significant and sustained fiscal consolidation and the government's strong commitment to continued reforms to reduce its high debt burden as well as (ii) significant improvement in the current account deficit of the balance of payments and reserve levels, which have reduced external vulnerability. 6 The 10.63% bond is scheduled to mature on 20 June It is not clear how liquid the GOJGBs are, but there is general sense that these bonds are not traded frequently. In this context, the available bid and ask prices on these instruments are derived by Bloomberg in its daily survey of key brokers with inventories of these instruments. These quotes therefore allow for the calculation of indicative bid and ask yields on the portfolio. 12

21 Quarterly Monetary Policy Report January to March 2017 Table 2: Jamaica's Sovereign Ratings: Selected Periods Da t e 30-Mar-98 8-Nov-99 1-Mar Aug Nov Nov-09 4-Jan Feb Feb-10 3-Mar-10 Source; Standard and Poors, Fitch and Moody s Rating Agencies Recent Trends in Indicators of Jamaica s Global Bonds S t a n da r d a n d P o o r s ' B/stable SD B-/Stable The behavior of the GOJGB yields and spreads have been symptomatic of the ebb and flow of perceptions relating to Jamaica s sovereign risks. Between July and December 2009, for example, a composite of the individual yields on the GOJGBs rose by 98 basis points, which translated into a rise in spreads of 79 and 221 bps relative to the US treasury and EMBI+, respectively. 8 This indicated market uncertainty about Jamaica s economic future as the GOJ s access to markets was terminated and rumours escalated about the possibility of a debt default. F i t c h B+/stable CCC/-ve B-/stable Mo o dy 's Ba3/stable Ba3/stable Caa1/-ve B3/stable 12-Feb-13 SD C 22-Feb-13 RD Caa3/stable 1-Mar-13 CCC 25-Sep-13 B-/stable 12-Feb-14 Caa3/positive 25-Feb-14 B-/stable 3-Jun-15 B/stable 11-Feb-16 B/Stable 21-Nov-16 B3/Stable The pricing of the GOJGBs has improved markedly relative to 2010 in the context of the steadfast economic reform programme that Jamaica has been undertaking. In January 2010, steps were taken by the Government to reverse its adverse debt dynamics with the announcement of Jamaica s first debt exchange, the National Debt Exchange (NDX) and the country s intention to enter into a borrowing arrangement with the IMF in support of its proposed economic reform programme. Of note, on 04 February 2010, the GOJ entered into a 27-month Stand-By Arrangement with the IMF, influenced by the GOJ s attempt to seek funds to assist it in coping with economic challenges which were exacerbated by the global financial crisis. he NDX entailed the voluntary exchange of bonds denominated in local currency for instruments of longer maturity and lower interest rates. This was expected to save the government J$40 billion per year in interest expenditure. Following the announcement of the terms of the NDX, which made it clear that holders of Jamaica s external debt would not participate in the exchange, yields and spreads fell progressively until June 2011, except for a short period in May 2010 (see Figures 1 and 2). Figure 1: Selected Sovereign Bond Yields (Per cent) Source: Bloomberg EMBI+ US Treasuries GOJGB Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Jan-17 8 The composite measure of GOJGBs is calculated as the weighted average of individual yields on the GOJGBs based on the basis-point-value (BPV) of each security. The BPV is calculated as the money duration times one basis point (0.0001); BPV = MonDur* The money duration (MonDur) is the modified duration (ModDur) times the market value of the security (MV); MonDur = ModDur*MV. The modified duration is the Macaulay duration (MacDur) divided by one plus the yield per period (y). MacDur ModDur 1 y 13

22 Quarterly Monetary Policy Report January to March 2017 Figure 2: Sovereign Bond Spreads (Percentage points) Source: Bloomberg Figure 3:Jamaica s Total Debt to GDP Ratio and GOJGB Spreads Per cent Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Jan FY2008/09 FY2009/10 Source: Bloomberg and Ministry of Finance, Jamaica For the period FY2008/09 to FY2009/10, total debt is based on the GOJ debt definition, which includes Central Government, Bank of Jamaica and external guaranteed debt. For the period FY2010/11 to FY2016/17, total debt is consistent with the definition used under the EFF approved in 2013, which incorporates the GOJ definition and also includes domestic guaranteed debt and debt holdings by PetroCaribe Development Fund. Between June 2011 and March 2013 the average yields on these bonds again rose from an average of 6.98 per cent to 7.89 per cent. The spreads on the GOJGB/US Treasury and GOJGB/EMBI+ also rose markedly from 4.08 per cent and 1.02 per cent, respectively, to 6.02 per cent and 3.13 per cent, respectively. The deterioration occurred in a context where the country did not complete an IMF review, which eroded confidence, lowered economic growth and resulted in acute balance of payments pressures. Since then, the government has committed to create conditions for sustained growth through improvement in fiscal positions and competitiveness. FY2010/11 FY2011/12 FY2012/13 GOJGB/US Treasuries GOJGB/EMBI+ FY2013/14 FY2014/15 FY2015/16 FY2016/17 Total Debt/GDP* (LHS) GOJGB /US Treasury Spread (e.o.p.) (RHS) GOJGB / EMBI+ Spread (e.o.p.) (RHS) Percentage points To continue its debt reduction efforts, in May 2013 the GOJ embarked on another economic reform programme, an Extended Fund Facility (EFF), which focused on achieving fiscal and debt sustainability, improving external competitiveness and restoring economic growth. The reaction of the ICM was favourable as spreads, relative to the US Treasuries and EMBI+ fell dramatically to 5.33 per cent and 1.96 per cent by end-december 2013, respectively. The momentum of the reform efforts allowed Jamaica, in July 2015, to undertake a debt operation which lowered its medium-term debt trajectory earlier than anticipated. The Government issued a dual-tranche bond in the amount of US$2.0 billion. This was the largest bond and the lowest coupon in the country s history. The bond issue facilitated a liability management transaction in which Jamaica purchased its debt owed to Venezuela's state-run oil company, PDVSA, at a discount. The transaction resulted in a reduction in the country s debt to GDP ratio by approximately 10 percentage points. The transaction was viewed favourably by investors thereby completely removing the spreads over emerging market debt, a reversal in the upward trend observed prior to There were, however, periods of temporary reversal in this generally faourable trend in Jamaica s bond prices. Expectations of general elections in Jamaica and uncertainty relating to the continuation of an IMF programme temporarily resulted in reduced investor appetite for GOJGBs in the latter half of As such, the spreads between the GOJGBs/USTB and the GOJGBs/EMBI+ widened by 60 bps and 29 bps, respectively for the period June to December However, demonstration of continued commitment to lowering the debt and improving the macroeconomic fundamentals again influenced a downward adjustment in spreads. 14

23 Quarterly Monetary Policy Report January to March 2017 The EFF was terminated and replaced with a Stand-By Arrangement (SBA) in November Under the SBA the country is required to maintain a primary surplus averaging 7.0 per cent of GDP over the medium-term, similar to the commitment under the EFF (see Table 3). This positively impacted investor confidence as reflected in GOJ spreads over EMBI+ being negative by December This means that Jamaica has enjoyed over the past year, pricing of its bonds that are better than its peers who are in a higher ratings category. enjoy favourable pricing on the ICM and positive reviews from the rating agencies. Over the near term, however, global bond markets may reprice downwards, reflecting uncertainties surrounding US economic and trade policies, the possibility of a hard Brexit, elections in Europe and expectations of additional rate hikes by the US Federal Reserve. will continue to monitor the performance of GOJ global bonds in forming its view about its monetary policy stance. Table 3: Jamaica: Selected Economic Indicators (% of GDP, unless otherwise indicated) Projections 2013/ / / / /22 Real GDP ( % change) Public Debt Budget Balance Of w hich: Primary Budget Balance Net International Res erves (US$ million) 1,304 2,699 3,177 3,621 3,837 Current account Source: IMF. Jamaica: First Review Under the Stand-By Arrangement. The definition of Public Debt for the period FY2016/17 and onwards is consistent with the definition being utilised by the IMF under the new precautionary SBA. It includes consolidated central government and public bodies' debt, consistent with the Fiscal Responsibility Law. The most significant deviation from the EFF definition is the exclusion of debt to the IMF held by the BOJ. Outlook Jamaican global bonds are expected to remain attractive over the medium-term in the context of continued improvements in the country s macroeconomy and debt sustainability indicators. The GOJ s debt is projected to continue on a downward trajectory from the current level of approximately per cent of GDP at end- FY2016/17 to approximately 81 per cent of GDP by FY2021/22 (see Table 3). Consequently, it is expected that the country s bonds will continue to 9 pdf 15

24 Quarterly Monetary Policy Report January to March Jamaican Economy Following eight consecutive quarters of expansion, the real economy is expected to expand within the range of 0.0 per cent to 1.0 per cent for the March 2017 quarter. This continued positive performance occurred against the background of sustained progress of the Government in implementing fiscal and macroeconomic reforms. Additionally, tourist-related activities, production support programmes within the agricultural sector among other growth-inducing initiatives augured well for the anticipated expansion for the quarter. Despite the weak performance of Mining & Quarrying and Producers of Government Services, all industries are estimated to have grown for the review quarter. The expansion in Aggregate Demand during the period was mainly attributed to growth in consumer spending and net external demand, the impact of which was partly offset by estimated declines in government consumption and investment spending. 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 Manufacturing, Electricity & Water Supply, Hotels & Restaurants as well as Agriculture, Forestry & Fishing. Economic activity over the medium-term 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 is expected to fall in the range of 0.0 per cent to 1.0 per cent for the March 2017 quarter (see Figure 14 and Table 4). With the exception of Mining & Quarrying and Producers of Government Services, all industries are estimated to have grown. The assessed expansion for the review period reflected improvements in Jamaica s macroeconomic landscape, consistent with the positive impact of structural reforms, continued fiscal discipline by the Government as well as greater investor and consumer confidence. Both tradable and non-tradable industries are adjudged to have expanded for the review period (see Figure 15). 1 However, the tradable industries grew at a faster pace when compared to the expansion in non-tradable industries. Notably, the growth in output in the tradable industries was mainly attributed to Agriculture, Forestry & Fishing Manufacturing and Hotels & Restaurants. The estimated increase in the non-tradable industries was primarily associated with expansions in Electricity & Water Supply, Finance & 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 Figure 14: Real GDP Growth (12-Month Per cent Change) Source: STATIN and Figure 15: GDP Growth: Tradable vs. Non-Tradable Industries (12-Month Per cent Change) 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 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Source: Tradable Non-Tradable 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 Dec-16 Mar-17 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. 16

25 Quarterly Monetary Policy Report January to March 2017 Insurance Services and Real Estate, Renting & Business Activities. Table 4: Industry Contribution to Growth (March 2017 Quarter) Contribution Estimated Impact on Growth GOODS to 0.5 Agriculture, Forestry & Fishing to 1.0 Mining & Quarrying to Manufacturing to 2.0 Construction to 1.5 SERVICES to 1.0 Electricity & Water Supply to 1.0 Wholesale & Retail Trade, Repairs & Installation to 1.0 Hotels & Restaurants to 2.0 Transport Storage & Communication to 1.5 Financing & Insurance Services to 2.0 Real Estate, Renting & Business Activities to 1.0 Producers of Government Services to 0.5 Other Services to 1.5 Financial Intermediation Services Indirectly Measured to 1.5 TOTAL GDP to 1.0 Source: Agriculture, Forestry & Fishing is assessed to have grown at a slower pace for the March 2017 quarter relative to the growth recorded over the second half of This deceleration was chiefly reflected in domestic crop production, the impact of which was partly offset by continued strong growth in traditional export crops (see Figure 16). There was strong performance in sugar production, associated with an early start of the crop season in December 2016.There were also estimated increases in banana and cocoa output during the review period. The deceleration in domestic crop production follows record output levels in the March 2016 quarter. Consequently, for the March 2017 quarter, it is estimated that production levels will remain generally in line with the corresponding period of Value added within Manufacturing is estimated to have grown for the March 2017 quarter. This expansion was indicative of growth in both Food, Beverages & Tobacco and Other Manufacturing (see Figure 17). In relation to Food, Beverages and Tobacco, growth was mainly associated with increased production of beverages, sugar & molasses as well as food processing excluding sugar. Similarly, Other Manufacturing is estimated to have recorded marginal growth as the production of refined petroleum products was assessed to be flat. Figure 17: Trends in Petroleum Products, Beverages & Tobacco and Food processing (12-Month Per cent Change) Source: Petrojam Ltd. Figure 16: Domestic & Export Crop Production (12-Month Per cent Change) 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 Dec-16 Mar-17 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 Dec-16 Mar-17 Source: & Ministry of Agriculture Domestic Crop Production Export Agriculture For the March 2017 quarter, Electricity & Water Supply is adjudged to have expanded, albeit at a slower pace when compared to the corresponding period of 2016 (see Figure 18). In particular, there was continued growth in electricity consumption proxied by the increase in total electricity sales. Similarly, water

26 Quarterly Monetary Policy Report January to March 2017 production expanded primarily due to continued rainfall during the review period, although remaining below the 30-year mean rainfall level and that which obtained in the March 2016 quarter. Figure 18: Electricity Consumption & Water Production (12-Month Per cent Change) Electricity Consumption Electricity Production Water Production 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 Dec-16 Mar-17 Source: Jamaica Public Service and National Water Commission quarter (see Figure 20). The estimated rise in output for Transport was attributed to an expansion in domestic cargo movement at the country s ports, as well as an increase in the number of cruise and air passenger arrivals into Jamaica over the review period. Figure 20: Visitor Arrivals & Domestic Cargo Movement (12-Month Per cent change) Total Domestic Cargo Movements Total Visitor Arrivals 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 Dec-16 Mar-17 Source: The Port Authority of Jamaica & Jamaica Tourist Board Following an average quarterly growth of 2.2 per cent during 2016, Hotels & Restaurants is adjudged to have grown at a slower pace for the first quarter This performance was inferred from the recorded growth in airport arrivals as well as from the improvement in the economies of Jamaica s main source markets (see Figure 19) (see International Economy section). Figure 19: Total Stop-Over Visitor Arrivals & Visitor Expenditure (12-Month Per cent Change) Construction is estimated to have expanded for the March 2017 quarter. The performance of the industry was largely driven by ongoing hotel constructionrelated activities and continued expenditure on road works under the Major Infrastructure Development Programme. However, housing starts managed by the National Housing Trust (NHT) declined marginally during the quarter while housing completion is assessed to have grown (see Figure 21) Stop Over Arrivals Visitor Expenditure Figure 21: National Housing Trust Housing Starts & Completion (12-Month Per cent change) 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 Dec-16 Mar-17 Source: Jamaica Tourist Board Value added in Transport, Storage & Communication is evaluated to have increased for the March 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 Dec-16 Mar-17 Source: The National Housing Trust NHT Housing Starts NHT Housing Completion 2 Following the spike in housing starts in the December 2016 quarter (Friendship Development, St. James), NHT housing starts were not as elevated during the review period. The industry was also impacted by the completion of several houses relating to the Granville housing development in Trelawny during the March 2017 quarter. 18

27 Quarterly Monetary Policy Report January to March 2017 Mining & Quarrying is assessed to have declined for the March 2017 quarter, reflecting contractions in both alumina and crude bauxite production due to lower capacity utilisation (see Figure 22). The decline in alumina production largely reflected operational challenges at some of the plants. The contraction in bauxite was due to a reduction in demand. Figure 22: Trends in Crude Bauxite, Alumina & Total Bauxite Production (12-Month Per cent Change) initiatives as reflected in lower expenditure on programmes. Figure 23: Remittance Inflows, Real Personal Loans and Total Credit Card Transactions: (Real Values) (12-Month Per cent Change) Remittance Inflows Total Credit Card Transactions Personal Loans Alumina (L.H.S.) Total Bauxite (L.H.S.) Crude Bauxite Production (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 Dec-16 Mar Source: and STATIN Figure 24: Business and Consumer Confidence Index (12-Month Per cent Change) 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 Dec-16 Mar-17 Source: Jamaica Bauxite Institute Aggregate Demand For the March 2017 quarter, Aggregate Spending is estimated to have increased. This assessment reflects estimated improvements in Private Consumption and Net External Demand, the impact of which was partly offset by declines in Public Consumption and Gross Capital Formation Growth in Private Consumption was inferred from real increases in the value of credit card transactions, remittance inflows, local GCT & SCT and personal loans (see Figure 23). Additionally, the projected growth in private expenditure was supported by trend improvement in consumer confidence (see Figure 24). With respect to the decline in Public Consumption, this was deduced from the Government s continued fiscal consolidation Consumer Confidence Index Business Confidence Index 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 Dec-16 Source: and Jamaica Chamber of Commerce The estimated contraction in Gross Capital Formation was mainly inferred from a decline in Direct Investment. This was partly offset by an increase in Central Government s capital expenditure. Net External Demand is assessed to have improved for the review quarter, reflecting an expansion in exports of goods which was partly offset by an increase in imports (see Figure 25). The performance 19

28 Quarterly Monetary Policy Report January to March 2017 of exports was largely attributable to expansions in sugar, mineral fuels, alumina and travel services, which was partially offset by a decline in banana exports. For imports, the expansion was mainly inferred from an increase in capital goods and fuel which was partly offset by a decline in consumer goods. 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 Figure 25: Trends in Exports & Imports of Goods and Services (US$ Millions) Outlook Imports Source: and STATIN Exports Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Real GDP is forecasted to expand within the range of 1.5 per cent to 2.5 per cent for FY2017/18 and strengthen at a faster pace further over the medium- term. The economy is expected to benefit from continued recovery in major industries and the materialisation of several growth-inducing initiatives. Furthermore, domestic demand is expected to be bolstered by anticipated improvements in consumer and business confidence. Growth is mainly expected to be reflected in Electricity & Water Supply, Hotels & Restaurant and Agriculture, Forestry & Fishing Monetary Policy The (BOJ) maintained its signal interest rate, the rate on its 30-day Certificate of Deposit (CD), at 5.0 per cent during the March 2017 quarter but reduced the frequency of the instrument s offer to once per week. However, the standard interest rate on the overnight Standing Liquidity Facility (SLF) was adjusted downward to 7.0 per cent from 7.25 per cent. Additionally, the allocation limits under the SLF for all deposit-taking institutions was increased by 20.0 per cent, while the interest rate payable on overnight deposits was increased to 4.00 per cent from 3.00 per cent. These adjustments resulted in the narrowing of the width of the Bank s interest rate corridor (IRC) from 425 basis points to 300 basis points, aimed at strengthening the signalling effect of the Bank s monetary policy actions. 3 Of note, the Excess Funds Rate (EFR) was unchanged at 9.30 per cent. Figure 26: Interest rate on BOJ s Certificates of Deposit Day Overnight SLF Repo The risks to the forecast remain skewed to the downside. These include the non-materialization of investment projects, unanticipated production Source: During the review quarter, BOJ also increased the reserve requirements for foreign currency prescribed 3 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. 20

29 Quarterly Monetary Policy Report January to March 2017 liabilities by 2.0 percentage points to 14.0 per cent. The adjustment was in furtherance of the effort to lessen the risk of dollarization to the financial system. The Bank s operations had a positive impact on liquidity conditions during the quarter. Liquidity was injected through net foreign currency purchases via the Surrender facility, maturing Variable Rate Certificates of Deposit (VR-CD s) and USD indexed notes as well as, to a lesser degree, occasional term Repos (OTROs) with tenors up to 50 days. These OTROs were aimed at smoothing the anticipated injection of approximately $65.0 billion from the maturing Fixed Rate 7.5% Benchmark Investment Note in May Overall, the Bank s operations net injected $64.4 billion, which exceeded net absorption of $58.2 billion from Government of Jamaica s (GOJ) operations (see Table 5). Notably, absorption by GOJ operations was $26.1 billion higher than that of the December 2016 quarter largely due to the impact of year-end tax receipts. Table 5: Liquidity Impact of BOJ & GOJ Operations BOJ Liquidity Facility (J$ Billions) Dec-16 Mar-17 Qtr. Qtr. Qtr. BOJ Repo Day OTROs Other OMOs (Other) O/N CDs * FR CDs VR CDs USD Indexed Notes BOJ FX (incl. PSE) Foreign Currency Purchases Foreign Currency Sales BOJ (Other) Net BOJ Operations (Inject/Absorb) GOJ Operations Net Total Operations (Inject/Absorb) Notes: * O/N CDs reflects the average of daily changes for each quarter to represent the associated liquidity impact. During the March 2017 quarter, continued to issue 3-, 5-, and 7-year US dollar CDs. The coupon rates on these tenors increased by 10, 15 and 20 basis points to 2.75 per cent, 3.70 per cent and 4.40 per cent, respectively. Overall, placements on USD CDs in the March 2017 quarter increased relative to the December 2016 quarter. This increase reflected stronger demand for the 7-year instrument, partly offset by lower placements on the shorter tenors. On 25 January 2017, US $44.2 million matured for the 3-year CD on 2017 (see Table 6). Table 6: Placements & Maturities of BOJ USD Instruments October -December 2016 January March 2017 Placements Maturities Average Placements Maturities Average (US$MN) (US$MN) Rate (%) (US$MN) (US$MN) Rate (%) 3-year year year TOTAL Source: Financial Markets An overall improvement in liquidity conditions during the March 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 27 bps, 16 bps and 3 bps, respectively. There was also a decline on the 180-day GOJ Treasury Bill (T-Bill) yield of 24 bps to 6.32 per cent. Figure 27: Selected Market Interest Rates Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 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. In contrast to the lower yield on the 180-day T-Bill, there were increases in the yields on the shorter tenors of bills. More specifically, yields on the 30-day and 90-day T-Bill increased by 46 bps and 18 bps to 6.10 per cent and 6.13 per cent, respectively (see Figure Dec-16 Mar-17 Corridor SLF Repo Overnight 30-day T-Bill 90-day T-Bill 180-day T-Bill 30-Day 30-day PMMR O/N PMMR O/N Interbank 21

30 Quarterly Monetary Policy Report January to March ). The uptick in yields on the shorter tenors of GOJ T-Bill reflected the impact of liquidity pressures from increased tax returns toward the close of FY 2016/ Foreign Exchange Market The weighted average selling rate of the Jamaica Dollar vis-á-vis the US dollar closed the March 2017 quarter at J$ = US$1.00, reflecting an annual rate of depreciation of 5.4 per cent, relative to 6.7 per cent at the end of the previous quarter (see Figures 28 and 29). For the March 2017 quarter, relative to the previous quarter, the exchange rate depreciated marginally by 0.2 per cent. This reflected appreciation of 0.1 per cent in both January 2017 and February 2017, partly offset by depreciation of 0.4 per cent in March The moderation in the pace of depreciation for the review quarter occurred in the context of a tempering of demand for foreign exchange as institutions became cautious about their Jamaica Dollar liquidity positions in the context of upcoming end-year tax obligations in a context of increased concentration of Jamaica Dollar liquidity. In addition, there were reports of increased USD cash supply within the market as well as moderation in end-user demand. Figure 28: WASR of Select Major Currencies (e.o.p.) (12 month point-to-point) % change Mar-13 Sep-13 Mar-14 Source: Sep-14 J$/US$ J$/CAN$ J$/GBP J$/EURO Mar-15 Notes: + = depreciation and = appreciation depreciation Sep-15 Mar-16 appreciation Mar-17 In this context, there was a reduction in net foreign currency outflows from authorized dealers and cambios during the quarter, primarily reflecting increased private current transfers and greater export of goods and services (see Figure 11). 4 Notwithstanding the moderation in the pace of movement in the exchange rate for the quarter, Bank of Jamaica, on two occasions during January 2017, provided USD liquidity support to the market amounting to US$122.3 million. These intervention sales for the month and the quarter were higher than the US$97.0 million sold to the market during the December 2016 quarter. The sales reflected the Bank s view that the movement in the exchange rate during the month, particularly the third week of January 2017, were disruptive and unwarranted. At end-march 2017, there was an estimated gain of 2.1 per cent in Jamaica s external price competitiveness, as measured by BOJ s real effective exchange rate (REER), relative to the REER at end- March This real depreciation was slower than the gain of 5.6 per cent that was estimated at the end of the December 2016 quarter (see Figure 11).5 The slow-down in competitiveness occurred against the backdrop of higher domestic inflation and slower nominal depreciation relative to Jamaica s major trading partners. 4 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. 5 On an annual basis, the Jamaica Dollar continued to depreciate visà-vis the US Dollar, the Euro and the Canadian dollar albeit at a more tempered pace than the previous quarter. The Jamaica Dollar appreciated against the Pound Sterling at a more moderate pace. 22

31 Quarterly Monetary Policy Report January to March 2017 Figure 29: The Real Effective Exchange Rate (REER), WASR and Net Demand (twelve month point-to-point percentage change) % US$MN WASR 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 Dec-16 Mar-17 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 Dec-16 Mar-17 Market Flows 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 excludes BOJ intervention Box 4: BOJ Signals Upgrade of FX Market Operations In its drive to enhance the effectiveness of monetary policy, (BOJ) is developing plans to buy and sell its foreign exchange from and to authorised dealers (ADs) and cambios by competitive auction. 1 Competitive auctions create a level playing field for all participants, provide transparency and efficient price discovery and protect the public purse. The Current Intervention Process Currently, intervenes in the market by buying (selling) foreign exchange directly from (to) ADs and cambios. The Bank s decision to intervene is guided by its drive to steadily accumulate reserves and its inflation target objectives. It also tries to limit excessive volatility in the exchange rate. Intervention Sales In initiating a sale, the Bank informs all ADs and cambios that it intends to sell an undisclosed quantity of foreign exchange at a fixed price and invites bids for this money. Where the sale offer is for a limited amount of money, the Bank reviews the participating institutions bids and prorates the amount of funds it offers to each, based on its internal criteria. Sales are typically settled on the same day, using, on most occasions, the previous day s weighted average selling rate (WASR). BOJ does not restrict the price at which ADs and cambios re-sell the intervention funds nor does it prescribe the recipients to whom the funds can be resold. Intervention Purchases Currently, the Bank purchases foreign exchange via three channels: its regular surrender arrangements, the public sector entity (PSE) facility, plus occasional purchases from individual institutions. Under the surrender facility, BOJ requires that ADs and cambios sell an agreed proportion of their purchases from clients to the central bank. Settlement is made on the same day, at the previous day s WASR. The PSE facility is the channel through which the Bank satisfies the foreign exchange demand of public sector entities. This arrangement requires ADs and cambios to sell an additional fixed proportion of their US dollar purchases to the Bank. These inflows are used to satisfy the foreign exchange demand of public sector entities. 23

32 Quarterly Monetary Policy Report January to March 2017 Occasionally, BOJ purchases foreign exchange from financial institutions who hold excess inventories. Weaknesses of the Current Selling Mechanism The current intervention sales method carries some inefficiencies. First, given that the intervention rate is at the previous day s WASR, it may not reflect the true market price on the day of the transaction. This means that some institutions may buy or sell foreign exchange from or to the central bank at a price that is either too expensive, or too cheap, compared to what those institutions would have paid in the market. This has the potential to cause undesirable, abnormal behaviour among the participants in the foreign exchange market. Where BOJ opts to limit the amount of foreign exchange that it sells at a fixed price, it has to unilaterally decide on the allocation of the funds, which may not necessarily align with the economic priorities at play in the system. The public is also generally unaware of BOJ s intervention operations and the outcome of these transactions. Moreover, BOJ itself is sometimes not fully aware of a build-up of excess demand in the system 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 results in large lurches in the exchange rate. Weaknesses of the Current Buying Mechanism: Some of the same drawbacks of selling foreign exchange at a fixed price are also drawbacks on the buy side. When institutions are required to sell foreign exchange to BOJ at the previous day s WASR, the price may be either too expensive, or too cheap, compared to what those institutions would have earned in the market. The transactions can therefore be considered by some as penal but as profitable by others. Finally, while BOJ may on occasion announce an operation to buy, the impact of this intervention has to be cautiously weighed, as even with evidence of substantial reserves, the market may falsely interpret such an announcement as some sign of distress, which may create undue panic. Measures to Improve the Current System One method of addressing these concerns is the introduction of a multiple-price FX auction. This would see the central bank, buying and selling, regularly and predictably, allowing the market to do so competitively, with a few rules and restrictions to ensure orderly and equitable trading. Auctions will enable market-based price signals and provide a more transparent process for transactions. Under this system, BOJ will no longer prescribe the exchange rate at which it trades with ADs and cambios, and foreign exchange allocation will no longer be done by opaque internal rules. Supporting Requirements for an Auction System An important component of the new trading arrangements will be for the central bank to improve its surveillance and forecast of the flows in the system, thereby allowing it to better anticipate temporary or permanent imbalances and to proactively act in the market to curtail the impact of these imbalances. The Bank will also carefully review the current codes, rules and prudential regulations surrounding the conduct of financial market participants, to identify opportunities to improve and to mitigate any undue risks that changes to the system could precipitate. Finally, a comprehensive communication plan will be developed and deployed to facilitate the smooth introduction and continued transparent operation of the system. While the PSE facility is considered a useful initiative in removing bulky and potentially distorting transactions from the FX market, the facility is not flexible enough to respond to sudden changes in market flows. A large entity may therefore experience a change in its foreign exchange needs but the PSE facility does not respond proportionally so that, over time, the facility experiences either a net drain or a net gain. 24

33 Quarterly Monetary Policy Report January to March Equities Market The equities market continued to demonstrate strong annual growth for the period ended March 2017, albeit lower than the growth in the corresponding period of the previous year. All indices on the Jamaica Stock Exchange (JSE), with the exception of the Cross Listed Index, recorded growth during the March quarter ranging between 37.7 per cent and 55.7 per cent. 6 Notably, the JSE Main Index grew by 45.4 per cent in comparison to increases of 27.6 per cent and 20.8 per cent for the previous quarter and the fiveyear annual average, respectively (see Figure 30). The performance of the equities market reflected positive macroeconomic developments including continued growth in GDP, low inflation, low interest rates and the continued accommodative monetary policy stance for the year. 7 These developments were complemented by one new junior market listing as well as Jamaica s continued strong performance under the precautionary standby agreement with the IMF coupled with favourable financial performance for the top-listed market capitalization companies. 8 Furthermore, investments in equities continued to provide greater returns relative to foreign currency and domestic money market investments. 9 More specifically, equities offered an annual average return of 46.3 per cent while GOJ global bonds offered an average return of 5.8 per cent. Additionally, the average annualized interest rate in the 30-day private money market was 6.7 per cent as at end-march 2017 (see Figure 31). Market activity indicators for the JSE Main Index showed an improvement for the March 2017 quarter. In particular, the growth in the value of transactions, volume of stocks traded and the number of transactions amounted to 13.2 per cent, 12.8 per cent and 9.2 per cent, respectively, which compares favourably to the outturn for calendar year 2016 of 5.2 per cent, -7.8 per cent and -3.0 per cent (see Figure 32). Figure 31: Returns from Private Money Market, GOJ Global Bonds and Capital Gains/ (Losses) from JSE Main Index (Per cent) Figure 30: Annual Growth of the JSE Indices (12-Month Per cent Change) JSE Main Index ALL JA SELECT Junior Market JSE Combined Index day Private Money Market Rate 12-Month Change in the Main JSE Index Weighted Average GOJ Global Bond yields and foreign currency gains (losses) 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 Dec-16 Mar 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 Dec-16 Mar-17 Source: Jamaica Stock Exchange and Bloomberg Source: Jamaica Stock Exchange 6 For the year end-march 2017 period, there were no stocks listed on the JSE Cross Listed index for the first time since 2008, resulting in an index value of 0.00 points. This was due to Trinidad Cement Limited being de-listed following its acquisition by CEMEX. 7 Notably, there were eight consecutive quarters of GDP growth with further expansion estimated to occur for the March 2017 quarter. 8 Main Event Entertainment Group is the new junior market listing, the IPO was oversubscribed and closed within one minute of being available to the public. 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 and paid out dividends during the last review period. 9 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. 25

34 Quarterly Monetary Policy Report January to March 2017 The improved outturn in the equities market was also reflected in the advance to decline ratio which increased to 24:6 for the year ended March 2017 relative to 21:9 for the year end Figure 32: Quarterly Change in the 12-Month Volumes, Values Traded & Number of Transactions (Main JSE Index) (Per cent) Dec-11 Mar-12 Jun-12 Sep-12 Source: Jamaica Stock Exchange Price appreciation was 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 6). The manufacturing and financial sectors accounted for six of the top ten advancing stocks. Additionally, the manufacturing sector reflected the highest average price appreciation of per cent for end- March Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Volume Values traded No. of Transactions Table 8: Commercial Bank Credit to the Private Sector Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Dec-16 Mar-17 Mar-16 Dec-16 Mar-17 Annual Flows (J$ mn) Private Sector Credit Percentage Change (%) Loans & Advances Percentage Change (%) Less Overseas Residents ( 490.7) Add Corporate Securities (415.1) Source: ^ Data as at February 2017 Table 6: Stock Price Appreciation Advancing Per cent Manufacturing Berger Paints (Jamaica) Kingston Wharves Seprod Limited Financial 43.9 Barita Investments Limited JMMB Group Limited Jamaica Stock Exchange Limited Conglomerates 33.6 Pan Jamaican Investment Trust Other 77.5 Palace Amusement Pulse Investments Kingston Properties Limited Declining Conglomerates Table 7: Stock Price Depreciation Per cent Jamaica Producers Group Other 138 Student Living Jamaica Ltd Sagicor Real Estate X Fund Manufacturing Salada Foods Source: Jamaica Stock Exchange Private Sector Credit Growth in private sector credit significantly increased in the March 2017 quarter. The annual growth in private sector credit at end-february 2017 was 30.7 per cent, which was stronger than the expansion of 10.0 per cent and 14.8 per cent in February 2016 and December 2016, respectively (see Table 8). However, much of this expansion reflected the impact of a new entrant to the commercial banking sector in February Excluding the impact of this institution, private sector credit would have grown by 15.9 per cent. The new entrant contributed to an increase in the stock of private sector credit to 27.8 per cent of GDP for the March 2017 quarter from 22.2 per cent in the March 2016 quarter GDP is calculated as the sum of the nominal value added (actual and estimated) over four quarters up to the current (March 2017) quarter. 26

35 Quarterly Monetary Policy Report January to March 2017 The continued expansion in private sector credit was underpinned by continued acceleration in economic activity in Jamaica in the context of stable macroeconomic conditions, supported by BOJ s generally accommodative monetary policy stance. As indicated by the Bank s survey of credit conditions for the December 2016 quarter, this growth in credit also reflected an easing in credit conditions. This easing was evidenced in the offer of more relaxed lending policies by institutions in their attempt to preserve or increase market share, while maintaining the quality of their loan portfolios. In addition, some institutions increased loan promotional activities through the offer of lower lending rates, fees and collateral requirements for households as well as small, medium-sized and large businesses in anticipation of the imminent entry of new players. Lenders also reported that they are expecting an increase in credit demand for the March 2017 quarter (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. Lending to households grew relatively faster at 42.9 per cent compared to growth of 17.1 per cent in business loans. Increased demand for personal credit was reflected in the continued demand for term loans and mortgages, relative to the corresponding quarter in The relatively slower pace of growth in credit to businesses reflected the impact of net repayments of loans outstanding to the Agriculture & Fishing sector, which was partly offset by increased credit made available to the Electricity, Gas & Water and Tourism sectors (see Table 9). Loans denominated in domestic and foreign currency grew by 14.5 per cent and 3.0 per cent, respectively (see Figure 33). Of note, growth in foreign currency credit for the review quarter was mainly reflected in the Electricity Gas & Water sector, while the Tourism and Distribution sectors were the main drivers of domestic currency loans. In real terms, loans extended to the private sector increased by 26.2 per cent as at February This compared favourably with the growth of 7.6 per cent Figure 33: Growth in Private Sector Loans and Advances (12-month percentage changes) Feb-12 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 Source: ^ Data as at February 2017 Table 9: Distribution of Total Loans & Advances to the Private Sector by Commercial Banks (J$MN) and 12.9 in the March 2016 and December 2016 quarters, respectively (see Figure 34). The real growth in credit supported an acceleration in economic activity during the period. Dec-15 Mar-16 Dec-16 Mar-17 Annual Flows Business Lending Percentage Change 9.9% 13.0% 12.6% 17.1% Agriculture & Fishing ( 93.7) ( ) Mining & Quarrying 57.9 ( 110.8) ( 21.7) ( 21.1) Manufacturing Construction & Land Development Transport, Storage & Communication Total Local Currency Foreign Currency ( 735.0) ( 710.5) ( ) ( ) ( 243.1) 29.0 Tourism Distribution Electricity, Gas & Water Entertainment ( 521.6) Professional & Other Services Household & Other Lending Percentage Change 9.9% 8.8% 14.6% 46.4% Personal o/w Demand loans o/w Term loans o/w Mortgage o/w Installment o/w Overdraft loans 48.4 ( 21.7) ( 161.8) ( 162.8) o/w Insurance premiums ( 0.0) 0.2 ( 0.2) 70.4 Overseas Residents Net Lending Annual Growth 9.9% 10.8% 13.6% 32.2% Source: ^ Data as at February

36 Quarterly Monetary Policy Report January to March 2017 Figure 34: Real Growth in Private Sector Credit (12-month percentage changes) Mar-12 Sep-12 Mar-13 Source: ^Data as at February 2017 Sep-13 Mar-14 Sep-14 Mar-15 Sep Mar Mar-17 Table 10: Commercial Bank Domestic Currency Weighted Average Lending Rates by Loan Type (e.o.p) Dec-15 Mar-16 Dec-16 Mar-17 OVERALL Public Sector Local Govt. & O.P.E Central Government Private Sector Instalment Mortgage Personal Commercial Source: ^ Data as at February 2017 Interest Rates With the conversion of a building society into a commercial bank, the overall weighted average lending rate of commercial banks declined by 123 bps for the quarter (see Table 10). This fall reflected lower interest rates on loans to both the public and private sectors. Lending rates to the private sector declined by 172 bps for the March 2017 quarter relative to the corresponding quarter in 2016, with rates for instalment credit recording the sharpest decline. The overall reduction in loan rates for the review period reflected the impact of the inclusion of the new commercial bank which had lower rates, as well as increased competition by institutions as lenders attempted to maintain and possibly increase market share. With the exclusion of the new entrant, commercial bank lending rates would have averaged per cent. Consistent with the increase in total loans was an improvement in the quality of commercial banks loan portfolio. In particular, the ratio of non-performing loans (NPLs) to private sector loans at end-march 2017 was 3.2 per cent, representing a fall of 1.2 percentage points, relative to end-march 2016 (see Figure 35). The annual decline in the NPL ratio reflected a fall of 4.1 per cent (or $0.7 billion) in total past due loans over the 12 months to February 2017, while private sector loans grew by 32.2 per cent over this period. However, there was a quarterly increase of 7 bps in the NPL ratio, subsequent on the inclusion of the new commercial bank in the review quarter. Money The monetary aggregates recorded significant growth in the March 2017 quarter, which was largely reflective of the inclusion of the new commercial bank in February Notwithstanding, the monetary base expanded at a slightly slower pace of 16.2 per cent at end-march 2017 relative to 18.7 per cent one year prior. This moderation primarily reflected a more tempered increase in currency issue, as the cash reserves and current accounts of commercial banks registered significant increases. The slower expansion in currency issue of approximately 10.0 per cent, compares to an expansion of 20.5 per cent in the March 2016 quarter. This moderation was associated with the impact of a deceleration in inflation throughout the fiscal year and to a lesser extent the removal of the seasonal impact of Easter on money demand, which was celebrated in March of Of note, real currency growth also moderated to 5.8 per cent at end-march 2017 from 17.1 per cent at end-march In contrast, the respective increases in the cash reserves and current account of commercial banks of 27.1 per cent and per cent largely reflected the impact of the inclusion of the new commercial bank in the monetary accounts (see Table 11). Of note, the exclusion of the new institution would have resulted in a more 28

37 Quarterly Monetary Policy Report January to March 2017 moderate expansion of 9.9 per cent in the monetary base. Regarding the sources of change in the monetary base, there was an increase of $76.3 billion (US$353.6 million) in the net international reserve (NIR), the impact of which was partially offset by a contraction of $56.8 billion in the net domestic assets (NDA) (see Table 11). The increase in the NIR was associated with inflows from foreign currency surrenders and net prudential reserves, the impact of which was partly offset by GOJ debt payments, net market sales through the intervention window and repayments on BOJ Certificates of Deposits in the month of January A build-up in Government deposits, arising from tax receipts garnered at the end of the fiscal year contributed to the contraction in the NDA. Figure 35: Commercial Bank Loan Quality (percentage) NPL to Private Sector NPL to Total Loans Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 Source: In contrast to the slightly slower growth in the monetary base, there was a significant expansion of 23.6 per cent in broad money (M2J) as at February 2017, compared with 14.7 per cent at end-march This significant increase mainly reflected the impact of augmented time deposits, which was associated with the incorporation of the new commercial bank. Of note, currency in circulation expanded by 11.0 per cent from 15.5 per cent reported in February At end-march 2017, the money supply, relative to GDP, was 19.5 per cent, compared with 18.5 per cent at end-march Table 11: Operating Targets Stock Flow Mar-16 Dec-16 Mar-17 Qrt-o-Qrt Y-oY NIR (US$MN) 2, , , NIR(J$MN) 276, , , , , Assets 331, , , , , Liabilities (54,896.3) (72,983.1) (70,765.8) 2,217.4 (15,869.5) Net Domestic Assets - Net Claims on Public Sector - Net Credit to Banks - Open Market Operations (156,953.3) (206,211.5) (213,802.5) (7,590.9) (56,849.1) 139, , ,459.5 (28,012.1) (21,404.0) (28,461.5) (41,560.3) (55,861.0) (14,300.7) (27,399.5) (61,049.9) (56,051.7) (51,835.4) 4, , Other (207,305.4) (255,071.1) (224,565.5) 30,505.5 (17,260.1) -o/w USD FR CDs (89,411.3) (103,492.9) (89,676.0) 13,816.9 (264.7) Monetary Base 120, , ,460.8 (1,237.3) 19, Currency Issue 79, , ,071.1 (10,200.9) 8, Cash Reserve 39, , , , , Current Account , Source: The measure of broad money supply that includes foreign currency deposits (M2 * ) also recorded stronger annual growth of 25.6 per cent at end- February 2017 on account of the inclusion of deposits from the new commercial bank. Growth at end- February 2017 compares with expansions of 17.4 per cent and 13.3 per cent at end-march 2016 and end- December 2016, respectively. The increase over the twelve months ended February 2017 reflected growth of 5.3 per cent in foreign currency deposits denominated in United States dollars, a deceleration when compared to an increase of 16.4 percent at end-february The dollarization ratio, the ratio of foreign currency deposits to total deposits for commercial banks, trended downwards to 46.3 per cent at end-february 2017 from 47.1 per cent at end-march However, the ratio increased when compared to the outturn of 46.0 per cent at end-december

38 Quarterly Monetary Policy Report January to March 2017 Box 5: Quarterly Credit Conditions Survey Figure 1: Index of Credit Conditions Overview Credit conditions in the financial system eased to their highest level during the December 2016 quarter since the start of the survey and were higher than expected (see Figure 1). The banking sector experienced increased competition during the December 2016 quarter in light of BOJ s approval of another commercial banking licence in September 2016, coupled with the expectation of the opening of a new bank in early In addition, in the context of the Banking Services Act (2014), the Bank facilitated a lowering of the capital risk-weighting for bank loans guaranteed by the Development s Credit Enhancement Facility. The improvement in credit conditions was reflected in lenders instituting more relaxed lending policies in their attempts at preserving or increasing market share, while maintaining the quality of their loan portfolios. The more relaxed lending stance was evident in both secured and unsecured loans for households and most business types during the review quarter. 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. Figure 2: Credit Supply Indices 110 The outlook for the March 2017 quarter is for continued easing in credit conditions, albeit at a slower pace, relative to the December 2016 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 December 2016 quarter continued to expand when compared to the September 2016 quarter. The overall Credit Supply Index (CSI) was , stronger than the CSI of for the September 2016 quarter (see Figure 2). This result was consistent with the quarter-to-quarter growth of 4.1 per cent in commercial bank credit extended to the private sector. Institutions willingness to provide credit was driven primarily by improved macroeconomic conditions and their desire to maintain market share Credit to businesses Credit Supply Index (CSI) Personal credit CSI Expectations 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. Lenders reported an increase in local currency credit available to both businesses and individuals, while the availability of foreign currency loans remained relatively unchanged from the September 2016 quarter. In regard to outstanding credit, personal loans continued to account for the greater proportion of credit allocation but moderated to 55.0 per cent from 62.0 per cent a year earlier. In contrast, the 30

39 Quarterly Monetary Policy Report January to March 2017 proportion of credit allocated to businesses expanded to 45.0 per cent from 38.0 per cent at end-december 2015 (see Figure 3). The increment in business credit during the review quarter reflected the impact of increased activity and opportunities in a cross-section of economic sectors. The proportion of credit allocated to firms of different sizes (large, medium, small and micro) reflected a similar pattern as in the previous quarter. Credit to large and medium-sized firms continued to account for the majority of total business loans at 60.3 per cent and 29.4 per cent, respectively. The share of credit allocated to small and micro-sized businesses constituted 9.5 per cent and 0.8 per cent, respectively. from which this increased demand emanated were mainly Manufacturing, Distribution, Electricity Gas & Water, Entertainment, Tourism and Transport, Storage & Communication. Credit demand by individuals remained strong for motor vehicle loans, debt consolidation, and lending secured on real estate, while there was reduced demand for credit cards. Figure 3: Distribution of Private Sector Loans In the December 2016 survey, respondents expected credit supply to continue its trend increase in the March 2017 quarter. This projected increase is underpinned by lenders reported strategy of maintaining or increasing market share, given new entrants in the market. Other factors cited include a positive economic outlook which prompted creditors to augment supply to businesses. Against this background, respondents reported that they plan to increase credit availability for all loan categories and currency types during the March 2017 quarter. Credit Demand Growth in credit demand, as measured by the Credit Demand Index (CDI), remained strong for the review quarter. The index, while holding relatively steady at 107.8, was significantly higher than the anticipated pace of growth in the September 2016 survey. Sustaining this growth was stronger demand for credit by firms of all sizes, the impact of which was partially offset by the weakening but positive growth in demand for personal loans. Growth in the demand for business credit strengthened in the December 2016 quarter, as indicated by an index of relative to in the September 2016 quarter (see Figure 4). The industries 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. 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 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. 31

40 Quarterly Monetary Policy Report January to March 2017 Lenders indicated that they expected the growth in credit demand to moderate in the March 2017 quarter. This moderation is expected to be reflected in the demand for personal credit, particularly loans intended for debt consolidation, those secured by residential property and other non-credit card loans. Demand for foreign currency credit by medium-sized firms is expected to contract marginally. In contrast, the expectation is for firms within the Agriculture & Fishing, Tourism, Transportation and the Electricity, Gas & Water industries to demand more local currency credit. Higher rates on loans to these firms were associated with reported changes in lenders risk appetite as well as their economic outlook for specific industries. Table 1: Interest Rates on Local and Foreign Currency Loans Figure 4: Credit Demand Indices Source: s Credit Conditions Survey Notes: *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. Price of Credit Demand by businesses Credit Demand Index (CDI) Based on the survey responses, average interest rates on new local currency loans increased by approximately 60 basis points (bps) to 15.6 per cent during the December 2016 quarter, relative to the previous quarter s outturn (see Table 1). 12 This implied an increase of 85 bps in business borrowing costs to 15.1 per cent, while the average rate on personal loans fell to 17.6 per cent from 18.2 per cent in the September 2016 quarter. Demand by individuals CDI Expectations The overall rise in the average interest rate stemmed from increases of 61 bps and 324 bps in lending rates applicable to small and micro-sized businesses to 13.6 per cent and 25.5 per cent, respectively. Source: s Credit Conditions Survey Notes: * Expectations for interest rates indicated by respondents of the survey However, lenders noted a reduction in interest rates on loans to large-scale enterprises and relatively unchanged interest rates for loans to medium-sized firms. Similar to the price movements on new local currency credit, the average interest rate on new foreign currency loans increased by 44 bps to 8.5 per cent. This expansion also reflected a reported increase in rates for small and micro-sized businesses. Conversely, lending rates for medium-sized firms remained constant at 7.6 per cent and the reported rate for large enterprises fell to 7.1 per cent. For the March 2017 quarter, lenders reported an anticipated increase in the price of credit on new local currency loans to all firm sizes. On the other hand, they expected the price of credit on loans denominated in foreign currency to fall marginally. For more detailed analysis of the survey see BOJ Credit Conditions Survey Report 12 Average interest rates are calculated using a simple average calculation on interest rates across the five (5) categories: ( ip+i l+im+is+i mi ) 5 32