The Bank of Jamaica announced Monday that it will hold its policy interest rate at 7 per cent for at least the next six weeks on continuing signs that inflationary pressure is easing.

Yet, a central bank frustrated that a year of rate hikes has done little to convince commercial bankers and other deposit-taking institutions to follow suit strongly has forced BOJ to reach for yet another tool it hopes will help to get the desired outcome.

That tool is the cash reserve requirement (CRR).

The central bank’s monetary policy committee (MPC) said, come April 1, it will require banks to hold 6 per cent of their customers’ deposits — the cash reserve requirement — in Jamaican dollars as reserves, effectively money it will not have to onlend. For foreign currency, the portion of deposits to be held as reserves will be increased to 14 per cent on that day as well. The new cash reserve requirement will be 1 percentage point above the current level and is the first increase since they were progressively reduced since 2019.

With less cash to lend the interest rate on the remaining deposits should go higher, since interest rate is the price of money and, like anything else, when money is short, its price increases.

That apart, another factor convincing the central bank to hold its key policy rate steady is inflation dipping in January to 8.1 per cent, marking the second-straight year-on-year slowdown in consumer prices. The forecast from the central bank is that as grain, fuel and shipping costs, which have been declining, continue to decline this year, the headline inflation in Jamaica will fall further, and may reach the target range of 4 to 6 per cent sometime in the December 2023 quarter — that’s between October and December this year.

Still, the BOJ has pointed to headwinds which could disrupt its forecast. It said in notes accompanying its monetary policy decision that a strong labour market could drive the very inflation it is trying to contain. At 6.6 per cent the latest unemployment rate which relates to July 2022 is among the lowest on record in Jamaica since Independence. It means fewer people are available for work, and that has created difficulties in businesses recruiting staff for their operations. The result is that higher wages and benefits are being offered, but it is as yet unclear how widespread this is to gauge just how much it will impact inflation. For sure though, businesses typically pass their higher labour costs on to their customers in the form of higher prices, thereby helping to fuel inflation. Also, consumers earning more tend to spend more as well. This increased spending could also drive inflation higher, especially if the supply of goods and services by producers still recovering from the pandemic-induced lockdowns and supply chain issues cannot meet the demand for their products.

However, all the news is not bad. For starters, the BOJ said the economy has now fully recovered, has returned to pre-COVID-19 levels of activity, and is expected to remain above pre-COVID levels in the near future. That came with the economy expanding strongly in the current fiscal year with the forecast that, come the end of March — the end of the fiscal year — the record will show growth reach of 4 to 5 per cent.

With the economy now back to where it was prior to COVID-19, growth will then moderate to a range of 1 per cent to 3 per cent, pretty much closer to the average growth rates over the last 30 years, showing that much more needs to be done to unhinge an economy that has been snailing along for decades due to structural impediments.