5 Reasons Why Jamaica’s Policy Rate Hike Is a Good Idea
Recently, the Bank of Jamaica (BOJ) had raised its policy rate from 0.5% to 1.5%, a dramatic 100 point basis point move upward. The response from this policy hike was not positive from those who benefit greatly from low borrowing rates. However, there are a number of reasons to look at Jamaica’s policy hike as a good thing. Here are five reasons why Jamaica made the right move on its policy rate.
1). It will help moderate inflation
Inflation is on the rise around the globe. The price of everything from food to raw materials is hitting new highs. In developing countries such as Jamaica, the effects on inflation can be crippling. Therefore, it is important for Jamacia to prevent easy access to money to spur further speculation and price hikes in the country. By rating the policy rate, Jamaica will be able to put some controls on inflation within its borders. This can save the country from crisis if inflation intensifies.
2). Reduces speculation
Low policy rates are designed to spur investment. However, when policy rates remain low for a sustained period, that easy access to money can turn investment into speculation. This could lead to incredible price hikes in everything from real estate to everyday goods. By raising the policy rate, the BOJ can prevent speculation from hurting everyday citizens who are looking for affordable housing, food, and other everyday necessities.
3). Can avoid a black swan event
When policy rates remain low for a long enough period, there is a chance that there is some company, financial institution, or government agency that has taken on way too much risk thanks to cheap money. This type of enhanced risk can lead to a black swan event such as what happened to Lehman Brothers in 2008. A single black swan event can lead to a crisis that can spread to other parts of the economy. By raising the policy rate, the BOJ can prevent the chances of a black swan event from hitting the countries economy.
4). Gets Jamaica “ahead of the curve” of other countries
As inflation continues to hit the globe, other countries will have to face the decision to raise their policy rates and protect their economy. The countries that act first will be better protected in case inflation gets out of control. Since Jamaica is one of the first countries to raise its policy rates, it will be better positioned to protect itself from a global inflationary recession.
5). Allows Jamaica to recover faster in case of a global recession
Finally, Jamaica will be better positioned to recover if a global recession does come to pass because of rampant inflation. This will allow the government to have to spend less on crisis-related expenditures such as bank bailouts, unemployment benefits, and emergency funding for businesses.
The bright side of a policy hike
It’s no fun to take your medicine. However, the BOJ is making the right move to provide some “preventative care” to the Jamaican economy in case of a global inflation-related recession. The result is that Jamaica could end up having one of the healthiest economies in the near future.
REFERENCE:
https://caricom.org/jamaica-raises-policy-interest-rate-to-moderate-inflation-caricom-business/
