Inflation eased in February for a third-straight month to its lowest level in more than a year, but analysts expect challenges in the US financial system will have a bigger impact on any action the Bank of Jamaica (BOJ) may take about interest rates when its monetary policy committee meets toward the end of this month, before disseminating its decision on March 29.

The consumer price index (CPI), a closely watched inflation gauge, rose 7.8 per cent in February from a year earlier, down from 8.1 per cent in January, the Statistical Institute of Jamaica (Statin) said on Wednesday. It was the smallest increase since December 2021 and well below the peak of 11.8 per cent recorded in April 2022.

At the same time, monthly data showed price pressures persisted with inflation from January to February rising by 0.5 per cent, its fastest pace since October, and significantly higher than the -0.6 per cent and -0.0 per cent rate recorded in the prior two months. At 0.5 per cent, the monthly inflation rate for February is at the top end of the average increase the BOJ is prepared to tolerate each month, but has been unable to achieve since mid-2021.

"It's trending in the right direction. It's good confirming data for the central bank which can maybe start to evaluate loosening monetary policy especially with what is occurring in the international markets," Keith Duncan, co-chairman of the Economic Programme Oversight Committee (EPOC), told the Jamaica Observer in reaction to the inflation numbers from Statin.

But analysts had a different view of the data and the impact the collapse of two large banks in the United States – Silicon Valley Bank and Signature Bank – may have on the BOJ's next rate decision.

Ahead of the collapse of those banks in the United States, economists had expected the Federal Reserve – the US central bank – to raise rates by as much as 50 basis points on strong job numbers in that country, in an attempt to slow its economy to take the wind out of red-hot inflation. At six per cent, the US CPI is well above the two per cent target the Fed has vowed to achieve. But with the collapse of the two banks, some economists now expect the Fed to suspend its year-long streak of interest rate hikes when it meets next week. With the collapse of two large banks since Friday fuelling anxiety about other regional banks in the US, the Fed, for now, is expected to focus more on boosting confidence in the financial system than on its long-term drive to tame inflation.

That is a sharp shift from just a week ago, when Chair Jerome Powell suggested to a Senate committee that if inflation didn't cool, the Fed could raise its benchmark interest rate by a substantial half-point at its meeting March 21-22.

"If the Fed maintains its rate, I expect the BOJ to maintain its rate, as well, when it meets later this month," one analyst told the Business Observer. "However, if the Fed moves 25 basis points, I expect the BOJ will hold its rates. The BOJ will only move its key policy rates upwards if the Fed goes more aggressive than 25 basis points," the analyst continued while requesting that his name be withheld for this article.

Consensus among analysts is that the BOJ will act on data as it has promised "and the current data say we can actually watch it some more".

The BOJ has been holding its key policy rate at seven per cent since December but has indicated that come April 1, banks will have to hand over $10 billion in local currency and US$45 million in foreign currency as part of their cash reserve requirement – monies that will sit in the central bank's vault, earning no interest while it is not available for lending. The hope is that this will see banks pushing up interest rates on the monies which remain to be onlend to achieve the BOJ's aim of getting higher interest rates in the economy to help push inflation down to the four per cent to six per cent range it is mandated to maintain.

But even though the BOJ has not moved rates higher in two months and is not expected to raise rates at the end of this month unless the Fed raises rates by 50 basis points, which is believed to be unlikely at this point, the analysts say the BOJ's monetary policy committee may start assessing whether the interest rate hikes over the last year may have happened too quickly, especially with the role interest rate hikes played in the collapse of the US banks.

"With everything going on, the BOJ may even be looking on and saying to itself, 'the pace at which we moving interest rates could be dangerous'. What the Silicon Valley Bank situation shows is that if you move too fast, you can create a lot of fair value losses in the market," the analyst noted. The fair value losses stem from debt securities the bank held losing value as interest rates rise.

"That is really the case why the banks have not increased their loan rates in Jamaica at the pace of the central bank, because if you move it that much your loan loss provision is going to be really high because you are going to have people defaulting," the analyst pointed out.

Still inflation remains a major concern. Of the 10 categories of goods and services from which Statin collects data on price movements to calculate its consumer price index, only two declined from January to February - the heavily weighted Food and Non-Alcoholic Beverages as well as the division which measures the cost of Information and Communication services in Jamaica.

During February, most of the inflation was driven by higher rates for electricity which outweighed declines in the prices of vegetables, tubers, plantains, cooking bananas and pulses. The decline in the overall food bill was however at a slower pace, -2.4 per cent in February than the -5.8 per cent pace it dipped by in January.

Still, food prices are up 11.3 per cent over the last year. That is separate from restaurant meals which have gone up at a much faster 15.6 per cent over the same period to February.