Hurricane Beryl’s Snowball Effect

Even if you weren’t directly affected by Hurricane Beryl, you’ll soon start feeling the effect on your pocket!

So what does Beryl have to do with your money?  Two things – inflation and interest rates… Cost of living and the cost of borrowing, both likely to go up because of Beryl.

Before Beryl, inflation in Jamaica was finally starting to trend down. But the storm caused significant damage in key agricultural parishes like St. Elizabeth and Manchester.  St Elizabeth alone produces 14% of the country’s food crops.

Food is the most heavily weighted factor in the calculations for inflation, especially fruits, vegetables and ground provisions.  With many of those crops wiped out, chances are prices will go up.  We may have to import some of those items, which comes at an additional cost. So brace for higher prices at the market and supermarket.

But wait, there’s more!  

Higher inflation also means that interest rates may not be coming down anytime soon like we’d hoped, which means that Jamaica’s stock market also might not recover as soon as we’d expected either.  

See there’s a whole chain reaction working here.  Let me explain how it’s all linked.

So when inflation is high, the Bank of Jamaica raises interest rates.  Economists believe that higher interest rates discourage people from borrowing, which in turn discourages consumption.  Less consumption means less demand.  Less demand drives prices down.  Cool?

So for the past year and change, Jamaica’s inflation has been high, so the BOJ has kept interest rates high.  Their strategy had finally started working, and we saw inflation fall to about 5% in May.

This led everyone to start calling on the BOJ to bring the interest rates back down, because high interest rates are bad for business.

So I asked the BOJ Governor Richard Byles in June if he was finally ready to make that move. And then boom! Here comes Beryl. If inflation goes up because of food shortages, that whole timeline is in jeopardy.

Now let me explain why high interest rates are bad for the stock market, and this is one of the reasons Jamaica’s stock market has been doing so poorly this past year.

Most of us think of interest rates as the cost of borrowing.  It’s something we have to pay when we get a loan.

But you also earn interest when you lend.  And if you’re an investor, you can take advantage of high interest rates to make a killing!  You earn interest on things like bonds, CDs and government treasury bills.

Now this past year, we’ve seen Mayberry do a bond paying as much as 10.5% interest.  We’ve seen NCB do a bond paying over 11%.

Now the big money’s thinking, if I can make an easy 11-percent return on a bond, why would I take the risk of investing in stocks?  And so a lot of investors have taken their money out of stocks and put them into things like bonds because of these high interest rates.  And this in turn weakens stock prices because if everybody’s selling and nobody’s buying, prices are gonna fall.

And then the other impact is on the housing market.  I’ve had one major real estate firm tell me their revenue is down 35% year to date!  That’s a huge hit! And it’s likely because people are waiting for interest rates to come down to make it more affordable to buy property.

Now on the bright side, maybe I’m making much ado about nothing.  Maybe food prices and inflation don’t go up.  I asked Agriculture Minister Floyd Green about it on Taking Stock. So make of that what you will.  But remember, we’re only at B!  This is just July.  The hurricane season goes to November 30, and it’s expected to be a highly active one.

And that’s the bottom line.