BOJ Cuts Rates Despite a Uptick in Inflation

  • At its meetings on September 26 and 27 2024, Tha Bank of Jamaica’s (BOJ’s) Monetary Policy Committee (MPC) unanimously agreed to further reduce the policy rate by 25 basis points (bps) to 6.50%, effective Wednesday, 01 October 2024. This will be the BOJ’s second consecutive rate cut in as many months.
  • The reduction in the policy rate comes mere days after the US Fed cut its policy rate by 50bps and is timely given the sharp slowdown in economic activity in Q2 to 0.1% from 1.4% in Q1 and the negative impacts of Hurricane Beryl, especially on the agricultural sector.
  • Despite a rise in consumer prices in  August 2024, stemming from the impact of Hurricane Beryl, the BOJ expects that headline inflation will return to its target range earlier than initially forecasted.
  • The BOJ’s outlook largely reflects the possibility of a lower-than-anticipated impact of Hurricane Beryl on agricultural supplies.
  • Furthermore, the measure of core inflation that excludes the prices of agricultural food products and fuel was 4.3% in August 2024, continuing the decline in underlying inflation since the start of 2024. Core inflation was 5.9% in January 2024, 9.7% in January 2023 and 7.1% in January 2022.
  • The MPC now anticipates a temporary uptick in headline inflation over the next 2 to 3 months in the context of the current active hurricane season, which ends in November.
  • The MPC's decision was influenced by the anticipated impact of Hurricane Beryl on the Jamaican economy and the delayed effects of monetary policy on spending. However, the BOJ forecasts that real economic activity for FY2024/25 will be more favourable than previously expected, thanks to a less severe estimate of Hurricane Beryl's effect. Still, the MPC believes that future interest rate adjustments will be gradual and depend on incoming data.
  • Over the past two years, many local sectors have faced challenges due to high interest rates. It is anticipated that these gradual reductions will enhance economic activity, which may subsequently facilitate a rebound in the stock market. However, this effect is likely to be delayed, as it generally requires approximately 18 months for changes in interest rates to fully work through the economy.

 (Source: BOJ, NCBCM Research)