Interest rates

Higher interest rates could be detrimental | Letters


I’m a professional sailor, not an economist. However, my interest in macroeconomic theory was sparked in high school by my scholarly “A” level economics teacher, and that interest has endured.

The very first thing I learned was that his class was how supply and demand intersect to determine the price of a product. In part, this basic economic theory is as follows – assuming the supply of a product is constant and there is an increase in demand for that product, then the price of that product will increase; on the other hand, keep the demand for a product constant and increase the supply, then the price will fall. Of course, in practice, neither demand nor supply is ever static. An example of this interaction between supply and demand is seen in the price of smart TVs over the past five years; supply greatly exceeded demand, leading to a dramatic drop in prices.

Recently, the Bank of Jamaica (BOJ) started raising interest rates, apparently to counter the current high rate of inflation; the economic theory being that higher interest rates will dampen demand and force producers to lower prices either through efficiency gains or other means.

However, from my personal observations and the majority of what I have read on this subject, it seems that it is a problem of supply and not demand. As a sailor, I’ve had a front-row view of the huge disruption to supply chains (we old school types call it “logistics”) caused by the COVID-19 pandemic; other spoilers include the ideological tension between the United States and China, and the Russian-Ukrainian war. Locally, I haven’t seen anything from STATIN to suggest there has been increased demand for products and services above pre-COVID-19 levels. It is therefore a problem of supply and not a problem of demand. This begs the question: why did the BOJ take this approach of higher interest rates to dampen demand, when the problem lies with supply?

The higher interest rate approach was attempted by Omar Davis in the not too distant past and we have yet to recover from that debacle; we cannot risk a repeat of this colossal error. If the BOJ insists on pursuing this policy, our parliamentarians need to become much more strident in questioning this approach. After all, it is assumed that the BOJ is neither infallible, a law in itself, nor a sacred cow; where is it?