THE Bank of Jamaica cut its key interest rate Thursday by a quarter-point in response to the steady decline in the once-high inflation that had squeezed households’ spending power, while also giving assurances that it will preserve relative stability in the foreign exchange market with its huge reserve. In the last two days alone, it sold US$90 million into the market to help meet demand and to keep the dollar from reaching $160:1 at this time.

Thursday’s BOJ rate cut reduced its benchmark rate to 6.25 per cent, pulling it further down from a 13-year high of 7 per cent. The BOJ had kept its rate that high for almost two years to fight the worst inflation streak in more than a decade. Annual inflation has since fallen from an 11.8 per cent peak in April 2022 to a three-year low of 4.9 per cent in October.

“Inflation is becoming more anchored in the Bank’s target range following the temporary impact of Hurricane Beryl on prices,” the central bank said in notes accompanying the release of its decision to cut rates for a third consecutive meeting of its monetary policy committee (MPC). The 4.9 per cent outturn was also lower than the most recent forecast and was within the central bank’s target range of 4 to 6 per cent. Core inflation (which excludes the prices of agricultural food products and fuel from the inflation data) was 4.5 per cent at October 2024, representing the 16th consecutive month that core inflation was below 6 per cent.

Going forward, the central bank projects inflation will remain broadly within its target range over the next two years as the prices for grains and inflation in the economies of Jamaica’s main trading partners continue to decline. Added to that is expectation amongst Jamaica’s private sector leaders that inflation will continue to trend downwards in the future. Their outlook is critical, since private sector leaders set prices.

Still, the rate cut comes as the central bank tries to prevent the economy from slipping into a deep slump. Already, the economy is believed to have already started to contract. Just a few days ago, the Planning Institute of Jamaica (PIOJ) said its estimates are that the economy dipped by 2.8 per cent in the July to September quarter with forecasts that the contraction will continue into this quarter. As a rule of thumb, two consecutive quarters of decline are classified as a recession, though some economic entities have a more complex formula for determining when an economy goes into a recession and many times they are called retroactively.

The forecast now for the current fiscal year which ends on March 31, 2025, is that the economy could contract by as much as 1 per cent, though growth could come out at an anaemic 0.5 per cent as well. The projection largely reflects the anticipated adverse impact of Hurricane Beryl on the economy and is underpinned by contractions for Agriculture, Forestry & Fishing and Construction. The outlook for the following fiscal year is for a partial rebound in economic activity with growth forecast to return in a range of 1 per cent to 3 per cent.

Increasingly worrying the central bank, though, is the uncertainties that come with indications that the United States, Jamaica’s main trading partner, will move towards protectionism when Donald Trump enters the White House for his second term as president.

Trump has promised to hike tariffs on imports and engage in mass deportation. And while the central bank did not name Trump, or the policies he said he will implement during his presidency, it is clear the impact on policy is already being weighed.

“Uncertainty related to potential economic policy changes among Jamaica’s main trading partners could have adverse implications for investment and remittance inflows, as well as inflation expectations,” the BOJ warned, though it included its usual rhetoric that “further escalation in geopolitical tensions, which could negatively impact international supply chains,” could push commodity prices up and stoke inflation in Jamaica. It also pointed out that worse-than-anticipated weather conditions in Jamaica could also put upward pressure on inflation.

Additionally, the central bank said anecdotal information suggests that private sector wage increases have stabilised at their pre-COVID rate, but reports of labour market pressures in selected sectors have emerged. In recent days, labour issues have been rocking the tourism sector.