Bank of Jamaica officials expect the construction and housing sector to be negatively affected by rising mortgage rates, but say there is no fallout yet in the hot market since the pandemic, with housing prices and valuations soaring amid higher levels of inflation and record low lending rates until last year.

The impending fallout on the housing market, which central bankers admit as a concern, is not seen by the BOJ as sufficient reason on its own to suspend hikes in its key rate.

On Friday, the BOJ adjusted its benchmark interest rate by half a point from 5.5% to 6.0% – the eighth upward revision to the rate it pays on credit institutions. day-to-day deposit of funds since last September.

The BOJ’s monetary policy committee, MPC, reporting Thursday on its Aug. 16-17 deliberations, said it saw lending rates start to climb.

“I think if rates continue to rise even beyond six per cent, it could impact our housing market here. We don’t have a fully market-driven mortgage market in the sense that the National Housing Trust plays a major role, and they’re not necessarily driven by market impulses,” BOJ Governor Richard Byles said. , in response to a question from financial gleaner.

“It’s a risk. I think that’s something we would watch very carefully,” he said at the bank’s quarterly monetary policy press conference on Friday.

Another senior BOJ official, Senior Deputy Governor Dr. Wayne Robinson, was even more blunt about the threat of higher rates in the housing and construction market.

“There is a risk, and we expect to see some slowdown, but at this stage we don’t think it would push the sector into a recession. There will still be a bit of a slowdown. At these interest rate levels, it wouldn’t push the construction and housing sector into recession,” Robinson said.

“When we look at mortgage credit trends through June, mortgage credit continues to grow quite strongly,” he said.

The U.S. housing market, in which unfavorable developments heralded the 2008 global recession, has been declared in recession, with the National Association of Realtors reporting this month that existing home sales fell for a sixth consecutive month. in July by 20% compared to the same period last year. Buyers are now believed to be buying the fewest homes since the pandemic began in 2020, although prices have yet to reflect the level of falling sales.

July marked the sixth consecutive month of declining sales.

The central bank is also not worried about what such a fall in the Jamaican market would mean for financial institutions, some of which are part of groups heavily invested in real estate portfolios.

“I don’t think DTIs are that heavily invested in the mortgage industry,” Byles said, singling out mortgages while reiterating the bank’s concern about the potential fallout on the industry as a whole. DTIs are banking institutions.

At Friday’s briefing, the central bank chief repeated the bank’s view, expressed in the MPC report, that signs of slowing inflation through June were encouraging. After peaking at 11.8% in April, annual point-to-point inflation slowed to 10.9% in May and June and 10.2% in July. Falling international commodity prices, relative exchange rate stability, tighter liquidity management by the BOJ and higher interest rates were credited by the central bank as the reasons for the slowdown.

The BOJ expects annual inflation to trend towards 9% for the rest of 2022, and decline further in early 2023, then move closer to the target range of 4-6% by December 2023, as long as tensions between Russia and Ukraine are not escalating. and inflation in Jamaica’s trading partners continue to decline.

The slowdown so far has not been enough to convince the monetary authority to rein in interest rate hikes. Byles said more encouraging macroeconomic signs are needed to sway such a decision.

The next rate decision is scheduled for September 29.

“Despite this good trend, the bank believes that these conditions have not strengthened enough to ensure that inflation is on a sustainable downward path. There remain significant downside risks. The fragile geopolitical situation with Russia, Ukraine and Europe in general, with its risks of knock-on effects on commodity prices, cannot be ignored,” the central bank governor said.

“Reported labor shortages in some sectors of the economy and pressures from our recent inflationary experiences carry the potential for future wage adjustments that could be inflationary. High inflation in the United States and other trading partners has prompted a more rapid monetary adjustment program, which could lead to capital outflows from Jamaica and exchange rate depreciation if domestic monetary policy does not is not properly aligned,” added Byles.

The BOJ is banking on its large international reserves, which now stand at US$4.3 billion, to protect the foreign exchange market from any turbulence should global and local conditions not ease.

Byles said the BOJ was ready to “pause its policy rate hikes” if incoming inflation data continues to fall the central bank would not abandon other policy tools for market intervention. These include buying and selling in the foreign exchange market and the buy-back system which requires banks to sell fixed percentages of their foreign currency contribution to the central bank.

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