Bank of Jamaica (BOJ) finally cut interest rates by a quarter point to 5.5 per cent because the direct impact of Hurricane Melissa on inflation was less severe than it initially anticipated, primarily due to a faster-than-expected improvement in agricultural supplies, supported by the recent exchange rate appreciation.

It now projects inflation to generally trend within target over the next eight quarters, with the possible exception of the June and September 2026 quarters, but that inflation will definitely return to target by the end of the December 2026 quarter, reflecting lower second-round price increases.

The primary driver of the cut would have been the news that annual headline inflation at January 2026 was 3.9 per cent, lower than both the BOJ’s projection and the 4.5 per cent rate at December 2025, due mainly to a faster-than-expected decline in food prices resulting from the swift recovery of agriculture in hurricane-impacted parishes such as St Elizabeth.

Perhaps, even more interestingly, core inflation (which excludes the prices of agricultural food products and fuel from the consumer price index) at 3.9 per cent was exactly in line with headline inflation, as well as lower than the out-turn of 4.2 per cent at December 2025.

Additional factors that the bank appears to be recognising, in line with many private sector analysts, is that, as during COVID-19, the closure of many hotels sharply reduced demand, which, when combined with imports, has softened the inflationary impact of the supply side shock.

Currently the BOJ sees the risks as balanced and indicates that they want to pursue a cautious “data-driven” approach. A key question to ask, however, is whether the BOJ needs to pursue a less cautious path of further interest rate cuts to assist Jamaica’s economic recovery. In its release, the BOJ only mentions inflation, with an apparent additional objective of preserving exchange rate stability, but the BOJ Amendment Act of 2020 notes that, “The Bank of Jamaica shall carry out its functions with a view to achieving the principal objectives stated in subsection (1) and shall do so in a manner that recognizes the growth and employment objectives of the Government.” This suggests that the BOJ’s mandate is not just to fight inflation, although this would obviously be its primary objective.

The inflation forecast takes into account an improved outlook for key domestic macroeconomic indicators. After possibly temporary breaches of the upper limit, the earlier-than-previously-anticipated return to target reflects a moderation of the bank’s forecast. In addition, private sector expectations of future inflation (inflation expectations), a key driver of headline inflation, are forecast to fall to normal levels over the near term.

The current account of Jamaica’s balance of payments is, however, projected to record higher deficits over the near term as the economy rebuilds from the Hurricane Melissa fallout, but the international reserves remain healthy and are projected to improve further. The forecast also considers the direct impact of the recently announced tax package.

The decision to reduce the policy rate followed detailed consideration of a number of factors, including:

1) The risks to the inflation forecast are balanced. On the downside, inflation could be lower due to a slower-than-anticipated recovery in domestic demand. On the upside, higher inflation could result from bad weather as well as higher-than-projected inflation expectations. In addition, upward price pressures may arise from increased overall domestic spending amid the post-hurricane recovery efforts. In particular, the Government’s temporary suspension of the fiscal rule will allow for fiscal deficits over the next three years. These deficits, in supporting higher spending in the economy, could place pressure on the country’s productive capacity and contribute to higher second-round price pressures.

2) We strongly encourage the BOJ to provide targeted liquidity support to the banking system as an increase in Jamaican dollar liquidity is essential to economic recovery. Higher liquidity will allow corporates and households greater access to the financing they need to rebuild.

3) The strategic use of the reserves to support the rebuilding of key infrastructure. We urge the BOJ to consider a strategic and managed approach to using the reserves to pursue the capital expenditure needed to rebuild essential infrastructure. While we understand that the BOJ has typically used the reserves to support exchange rate stability, the current situation dictates that the reserves must serve the national interest of rebuilding our key infrastructure.

4) We further suggest that the BOJ temporarily widens the inflation target range (similar to during the COVID-19 pandemic period) to support the economy post-crisis. There has been a shock to the supply of agricultural produce which will push inflation up. However, the temporary closure of some hotels will help to offset this impact by reducing aggregate demand. Additionally, the importation of agricultural produce will eventually help to soften the inflationary impact of the supply side shock to the local food industry.

Our core recommendation is for the bank to consider a pivot to an accommodative monetary policy stance in the post-crisis period. Evidence supports this approach. We have attached a working paper from the International Monetary Fund (IMF) that evaluates monetary policy outcomes in disaster-prone developing countries. The model-based findings suggest that an accommodative approach can help to absorb supply and demand shocks, help to prevent recession traps, and accelerate recovery in cases in which fiscal space is limited.

The referenced IMF paper also suggests that there is a range of policy options available to central banks. It found that while the interest rate was the main policy tool utilised by central banks in the aftermath of disasters, several other tools were utilised, such as the money supply.

Keith Collister