THE Bank of Jamaica (BOJ) left its key interest rate unchanged at 5.75 per cent on Wednesday, choosing to wait and see how global events play out before making its next move. The central bank said that while prices at home are rising at a manageable pace — helped by lower food and electricity costs — it is worried that inflation could be pushed higher later this year as conflicts and changing US trade policies could make the things Jamaica imports more expensive.

The bank’s caution comes even as the latest data shows positive domestic signs. Inflation fell to 3.3 per cent in July, well below its target range of four per cent to six per cent while “core” inflation — which strips out volatile food and fuel prices — stands at 4.3 per cent. The fact that headline inflation is lower than “core inflation” suggests that the recent sharp decreases in agricultural food prices and energy costs are the main drivers pulling the overall inflation number down. This period of low inflation has been underpinned by a favourable global environment, with US inflation decelerating to 2.7 per cent and key import costs falling; the average price of grains dropped 9.1 per cent and shipping prices also declined over the past year.

Despite the current low inflation, the bank faces a challenge in managing future expectations. Its own June survey of businesses showed that they expect inflation to be 7.1 per cent a year from now, a figure that has remained stubbornly high. Compounding this, businesses are anticipating a faster depreciation of the Jamaican dollar.

However, policymakers are looking ahead, noting that the main threat to stable prices will come from abroad, specifically through the cost of imported goods like oil and grain.

“Higher inflation could stem from a sharper-than-anticipated increase in tariffs faced by the US trading partners, resulting in higher imported inflation and inflation expectations,” the BOJ said in notes justifying the rationale for keeping its policy rate steady for the next six weeks. The BOJ’s monetary policy committee which makes decisions on rates meets next on September 25 and 26 and will communicate its decision on September 29.

Furthermore, a renewed escalation in geopolitical tensions could disrupt international supply chains, pushing inflation higher than expected. Conversely, a sharper decline in global commodity prices or weaker demand could result in lower inflation.

“Over the next two years, headline inflation is projected to generally trend within the Bank’s target range,” the central bank said. “However, inflation is projected to remain below the lower end of the inflation target over the next few months before increasing towards the centre of the target range,” it added as it pointed out that the “projected breaches mainly reflect the temporary impact of improved agricultural supplies, following the shock to the agriculture sector in 2024, as well as lower electricity costs in the context of the reduction in the GCT on electricity charges.”

Despite these global uncertainties, the central bank’s ability to adopt this patient stance is underpinned by Jamaica’s strong economic defences. The BOJ pointed to a record-high stockpile of foreign reserves, which stand at US$6.1 billion, and a current account surplus — a measure showing the country earns more from abroad from sources like tourism and remittances than it spends on imports. It also noted that the domestic banking system remains sound and that the Government’s fiscal policy poses no near-term risk to inflation. These factors provide a vital shield, ensuring the country can afford its imports and weather potential global volatility without a crisis.

This patient monetary policy is also intended to support the ongoing economic recovery. The bank projects real gross domestic product (GDP) growth will recover to a range of one to three per cent for the current fiscal year, driven by positive performances in agriculture, mining, and tourism, before settling into a longer-term trend of one to two per cent.

That defensive shield has already been deployed. The Jamaican dollar depreciated by 2.6 per cent over the past year, with pressure particularly evident in the last few months. The BOJ attributed this to temporary global uncertainties and market psychology. To defend the currency and curb imported inflation, the bank actively sold a substantial US$345 million from its reserves during the quarter, a move it said successfully eased demand pressures.

The BOJ’s cautious hold mirrors the complex picture facing its largest trading partner. The report noted that the US Federal Reserve is maintaining its policy rate at 4.25 to 4.50 per cent amid its own economic shifts.

“The US continues to reset its economic relationships with its trading partners and tighten its immigration policies,” the BOJ warned, developments which may slow US economic activity and stimulate inflationary pressures there.

More importantly for Jamaica, the Fed is expected to begin cutting its own rates later this year, a shift that could weaken the US dollar and ease the pressure on the Jamaican currency, thereby helping to curb the very imported inflation the BOJ fears. Over the near term, the BOJ forecasts that continued declines in global grain prices (around two per cent) and oil prices (five per cent) should help keep imported inflation in check, barring any major new shocks.

The Monetary Policy Committee reaffirmed its commitment to maintaining low and stable inflation and said it “will deploy the tools necessary to preserve price and foreign exchange market stability”, promising to carefully monitor incoming data and adjust its policy accordingly.