THE Bank of Jamaica (BOJ) held its benchmark interest rate steady at 5.75 per cent on Thursday, striking a vigilant tone as it warned that inflation risks have increased substantially following the devastation caused by Category 5 Hurricane Melissa that struck the island on October 28.

The central bank said it was prepared to tighten monetary policy further if needed, even as it forecasts the economy will contract by up to 6 per cent this fiscal year.

Following meetings on December 16 and 17, the Monetary Policy Committee (MPC) unanimously decided to maintain the rate offered to deposit-taking institutions. The move highlights a critical policy dilemma — balancing support for an economy facing severe hurricane damage against the imperative to prevent a destabilising inflationary spiral.

The bank’s statement highlighted that the economic impact of Hurricane Melissa was “more pronounced than initially anticipated”. Updated assessments show damage to infrastructure exceeds 40 per cent of GDP (gross domestic product), up from a prior 30 per cent estimate. The critical agriculture sector suffered damage valued at roughly 50 per cent of its 2024 output.

This physical destruction is translating directly into higher prices for consumers. Annual headline inflation rose to 4.4 per cent in November 2025, up from 2.9 per cent in October and above the bank’s forecast. The BOJ expects inflation to “rise sharply” in coming months and breach its 4 per cent to 6 per cent target range by early 2026.

Of greater concern to policymakers is the trajectory of core inflation, a more stubborn measure that excludes volatile food and fuel prices. It rose to 4.3 per cent in November, signalling that price pressures are spreading beyond the immediate shock of the hurricane.

The MPC explicitly warned of “second-round effects”, a process in which the initial surge in essentials like food and energy eventually pushes up the cost of a wider range of goods and services. This could mean higher prices for home repairs, restaurant meals, and personal care items as businesses pass on their own increased costs and as heightened inflation expectations become embedded in the economy.

Analysts would characterise the BOJ’s inaction as a “hawkish hold”. This term describes a central bank decision to keep interest rates unchanged while communicating a strong bias towards future tightening; that is interest rate hikes, often in the face of conflicting economic signals.

Typically, a severe economic shock like a hurricane would prompt calls for monetary easing to stimulate growth. However, the BOJ is prioritising its inflation mandate. By holding rates firm and explicitly warning it is “prepared to adjust the stance” and “take the necessary policy action”, the bank is attempting to “anchor inflation expectations”. It aims to prevent businesses and consumers from embedding higher future inflation into their pricing and wage decisions, which would make the inflation problem more persistent.

The stance is made more hawkish by the context of expansionary fiscal policy. Parliament has suspended the nation’s fiscal rules for one year to enable increased recovery spending, which is projected to widen the budget deficit. This substantial fiscal stimulus adds to aggregate demand, further fuelling the inflation risks the BOJ is trying to mitigate.

The near-term economic outlook is bleak. The BOJ projects real GDP will decline between 4 per cent and 6 per cent for the 2025/26 fiscal year due to widespread damage to infrastructure and productive capacity. A fragile recovery is anticipated in the following year, with growth forecast in a range of -1 per cent to 1 per cent.

The recovery is expected to be financed significantly by “financial inflows from multilateral and private sources”. The bank noted that the country’s external reserves remain robust, providing a buffer even as the current account deficit is expected to worsen in the short term.

The MPC pledged to “continue to closely monitor the incoming data”, with particular focus on the second-round effects on core inflation. The committee’s statement concluded with a clear directive: It will act if the risks “threaten the projected return of inflation to the target range in the shortest possible time”.

The central bank’s next policy decision announcement is scheduled for February 23, 2026.