BREAKING NEWS: BOJ (@CentralBankJA) has LOWERED its key policy rate by 25 basis points (0.25%) to 0.50% from 0.75%, effective Wednesday, August 28, 2019.
See my thoughts below, oh I have a lot of them.
The first few tweets will be digesting this statement.
See my thoughts below, oh I have a lot of them.
The first few tweets will be digesting this statement.
BOJ’s decision is based on their assessment that inflation is projected to average 4.3% over the next 8 quarters, which is barely within the target range of 4% - 6%.
They believe that if they didn’t cut the rate, inflation would fall below 4% at various points in that period.
They believe that if they didn’t cut the rate, inflation would fall below 4% at various points in that period.
That 4.3% inflation forecast is mainly driven by continued low domestic demand conditions relative to the economy’s capacity [My Translation: credit isn’t flowing into the economy as freely as it should be, which reduces local purchasing power], slower growth among Jamaica’s...
...main trading partners [My Translation: they are assuming that worries about a global recession will negatively impact economic growth in the US and our other main trading partners], and declines in international commodity prices [ie bauxite, alumina, etc. will be cheaper...
...so local producers will earn less, but also local consumers will pay less for gas due to lower oil prices].
They also expect as JPS diversifies away from Heavy Fuel Oil to cheaper, cleaner sources, our energy prices will rise slower, which will be a drag on inflation.
They also expect as JPS diversifies away from Heavy Fuel Oil to cheaper, cleaner sources, our energy prices will rise slower, which will be a drag on inflation.
The key goal of this policy rate reduction is to stimulate faster private sector credit growth, which will lead to more firms expanding and hiring and ultimately higher economic activity, and bring inflation to the middle of the target range.
My thoughts now 😬
For starters, this is HUGE news for multiple reasons. Many of us on Finance Twitter didn’t expect this.
I, for one, predicted that the policy rate will remain unchanged. It had already been at a historical low of 0.75% and it had been working.
For starters, this is HUGE news for multiple reasons. Many of us on Finance Twitter didn’t expect this.
I, for one, predicted that the policy rate will remain unchanged. It had already been at a historical low of 0.75% and it had been working.
You can see my original prediction here:
The main rationale behind my prediction was that typically central bank governors are conservative by nature. They watch every word they say, and they are cautious with their moves.
https://twitter.com/marcgayle/status/1162158159261253635?s=21
The main rationale behind my prediction was that typically central bank governors are conservative by nature. They watch every word they say, and they are cautious with their moves.
So this move by the new governor is a declaration of his intention. He wants to see economic growth. He wants to see private sector credit created at a faster rate than it currently is. As a banker with so much experience it isn’t surprising he would want that...
...but it is refreshing to see that he is being bold and making his intentions known.
His first act out the gate is a shot across the bow of both the MoF and the banking system.
So that brings me to the MoF @DrNigelClarkeJa.
The MoF has said he wants faster economic growth.
His first act out the gate is a shot across the bow of both the MoF and the banking system.
So that brings me to the MoF @DrNigelClarkeJa.
The MoF has said he wants faster economic growth.
The new governor has loudly declared that he will do his part to both encourage and facilitate that, right out the gate. He doesn’t need to settle in, he means business.
The banks have long complained that the asset tax they have to pay (at 33% I believe) is too high...
The banks have long complained that the asset tax they have to pay (at 33% I believe) is too high...
...and a hindrance to private sector credit creation.
With the IMF programme coming to an end in November, gov revenue performing above target, perhaps now is a time to call the bluff of the banks.
MoF, why not reduce the asset tax on DTIs (banks) from 33% to even 28%...
With the IMF programme coming to an end in November, gov revenue performing above target, perhaps now is a time to call the bluff of the banks.
MoF, why not reduce the asset tax on DTIs (banks) from 33% to even 28%...
...for a temporary period. Say 3 - 6 months. Be clear. The only purpose of the reprieve is to facilitate private sector credit expansion.
So if credit expansion hasn’t either hit a target or increased materially, within that time period, then you can put it back.
So if credit expansion hasn’t either hit a target or increased materially, within that time period, then you can put it back.
They can’t blame the IMF, the asset tax nor the overnight rate. No more excuses.
Make it small enough such that the previous outturns can buffer for any revenue shortfall, but big enough to be material for them to free up the excess liquidity this rate cut creates.
Make it small enough such that the previous outturns can buffer for any revenue shortfall, but big enough to be material for them to free up the excess liquidity this rate cut creates.
The timing would be perfect, just in time for Christmas. So banks can roll out more aggressive loan products to companies, and companies can bulk up in time for the holidays.
The timing could be perfect.
So @DrNigelClarkeJa, I look forward to seeing your response.
The timing could be perfect.
So @DrNigelClarkeJa, I look forward to seeing your response.
Even if Dr. Clarke doesn’t do what I suggest (which I think would be a missed opportunity), this rate cut will likely be beneficial for businesses and for equities.
The lower the overnight rate is, is the more demand for higher-yielding assets like equities.
The lower the overnight rate is, is the more demand for higher-yielding assets like equities.
As an investor in the local stock market, you can expect to see even more activity on the upside pushing up prices, based on more money flowing into equities.
But depending on how long it takes this rate cut to reach the productive sector, we should eventually start seeing....
But depending on how long it takes this rate cut to reach the productive sector, we should eventually start seeing....
...better results from companies as they expand and grow as credit becomes cheaper and more available.
I don’t expect to see all of these effects immediately, but we can generally expect this to have a bouyant effect on the JSE & JJSE.
I don’t expect to see all of these effects immediately, but we can generally expect this to have a bouyant effect on the JSE & JJSE.
Btw if you want to learn how to read financial statements and make better investment/business decisions, you should consider my Beginners Finance Masterclass this Saturday (streaming only).
For more details 👇🏾👇🏾👇🏾
For more details 👇🏾👇🏾👇🏾
https://twitter.com/marcgayle/status/1165379563284815873?s=21
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