THE Bank of Jamaica (BOJ) on Monday cut its benchmark interest rate for the first time this year, signalling growing confidence that inflation pressures have eased — even as it warned that expanded Government spending to rebuild after Hurricane Melissa could rekindle price risks.

The Monetary Policy Committee (MPC) reduced the policy rate by 25 basis points to 5.50 per cent, the first cut since May last year, saying recent data showed inflation stabilising more quickly than anticipated. The move marks a cautious shift from fighting hurricane-driven price spikes toward supporting economic recovery.

It came as annual inflation fell to 3.9 per cent in January, below both the bank’s earlier projection and the 4.5 per cent recorded in December. Core inflation — a measure that strips out volatile food and fuel prices to show underlying trends — also eased to 3.9 per cent from 4.2 per cent in December, reinforcing the view that underlying price pressures have moderated.

The slowdown was driven largely by improved agricultural supplies following the October 28, 2025 hurricane and a mild appreciation in the exchange rate, developments that helped reverse the surge in food prices seen late last year.

For households and businesses, the rate cut could gradually reduce borrowing costs if commercial banks adjust their own lending rates in response, offering relief after a prolonged period of tight monetary conditions.

The central bank now expects inflation to remain broadly within its four to six per cent target range over the next two years, with only temporary breaches possible in mid-2026 before returning to target by year-end. Policymakers said inflation could either ease further if demand remains soft, or rise again if rebuilding spending pushes up prices.

That warning comes as the Government has temporarily relaxed its fiscal rules to allow wider deficits while financing reconstruction and social support. Although authorities still project a primary surplus — meaning the Government collects more than it spends before paying interest on its debt — overall borrowing will increase during the recovery phase.

The BOJ cautioned that if reconstruction spending pumps more money into the economy before supply fully recovers, price pressures could return. The signal was clear: Easing will proceed carefully, and fiscal expansion cannot be allowed to undermine price stability.

Still, the economy itself remains fragile. The BOJ estimates that real gross domestic product (GDP) will contract between 1 and 3 per cent in the current financial year as the hurricane’s impact works through agriculture and tourism. Growth is projected to rebound to between 1 and 3 per cent next year as reconstruction gathers pace, but officials say it is more likely to fall short of that range than exceed it.

Unemployment stood at 3.3 per cent in October, though furloughs in the tourism corridor could influence future readings. International reserves remain healthy and are projected to strengthen further, even as the current account deficit widens in the near term due to higher imports for rebuilding.

Monday’s decision signals a careful shift in policy rather than an aggressive easing cycle. After months focused on containing storm-driven price shocks, the BOJ now appears confident inflation has stabilised — but determined not to let rebuilding efforts undo that progress.

The committee said it stands ready to adjust policy if risks shift and threaten the projected return of inflation to target. Its next decision is scheduled for March 31.