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BOJ moves to contain inflation

With inflation running at between 15-18 per cent on a calendar year basis, Central Bank Governor Derick Latibeaudiere and his team at the institution raised all its benchmark rates last week Wednesday, in order to contain the spreading virus. The 30; 60; 90; 120; and 180-day tenures were all jacked up by 100 basis points.

In a release over the signature of Governor Latibeaudiere, the bank said that the realignment of interest rates will place it in a better position to manage the Jamaican dollar liquidity that will emanate from both the maturity of both BOJ and Government of Jamaica (GOJ) instruments, as well as the re flow of currency issued for the Christmas season.

The bank also asserted that the revised rate structure offers investors a range of options that more closely reflected current money market rates.

The primary role of a central bank is to control the flow of high-powered reserves currency in circulation and checkable demand deposits in an economy at a level which is consistent with price stability and the highest levels of employment possible.

Currency in circulation in the Jamaican economy jumped by almost 25 per cent to about $50 billion during the Christmas season, pushing the velocity of circulation to just 15. This was, however, lower when checkable demand deposits were included. The velocity of circulation is a measurement of how many times a given stock of money changes hands in order to facilitate GDP transactions.

Although the monetarists, such as Professor Milton Freidman and his disciples, such as Robert Lucas and Tom Sergeant of the University of Chicago, contend that velocity is a hard constant. In reality it tends to be higher when monetary policy is tightened, as investors economise on their cash balances.

Every international central bank, except the US Federal Reserve Board, is currently hiking interest rates in order to contain the spread of the dreaded inflation virus, which is being driven by galloping food and energy prices.

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