Fitch Solutions Expects BOJ’s Cutting Cycle to Continue in 2025

  • With the Bank of Jamaica’s (BOJ’s) next meeting scheduled for November 21, Fitch Solutions anticipates two additional 25 basis points (bps) rate cuts in November and December, bringing the rate down to 6.0% by year end.
  • This is based on the observation that GDP is slowing and is projected to contract in Q3 2024. Additionally, core inflation is easing, and recent spikes in headline inflation are likely to be temporary. Supply-side issues, such as hurricanes damaging farmers' yields, are not expected to result in a long-term rise in inflation, especially as international commodity prices are declining. Furthermore, the Fed's reduction of its policy rate alleviates external constraints on the BOJ.
  • Fitch Solutions also revised its year-end interest rate forecast to 6.0%. After the November meeting, the BOJ’s Monetary Policy Committee will convene one last time in December, where another 25bps cut is anticipated. Inflation is expected to resume its downward trajectory in Q4 2024, ending the year at 5.7% year-on-year, driven by weaker demand and the diminishing effects of the recent spike in annual food price growth.
  • Furthermore, Fitch forecasts that the policy rate will be lowered to 4.50% by year-end 2025, as the global easing cycle, led by the Fed, continues and the BOJ gains more room to stimulate the economy.
  • This scenario is premised on a reduction in the Fed’s funds rate to 3.00% by mid-2025. Fitch’s observation is that the BOJ tends to respond to the Fed's cuts, exemplified by the 25 basis point reduction after the Fed's 50 basis point cut on September 18th. Following softer growth in 2024 (BMI forecast: 0.5%), the BOJ is likely to aim for growth stimulation in 2025 through lower rates (BMI forecast: 2.3%). However, a persistently negative output gap may limit the immediate effects on inflation, which is expected to remain relatively contained in 2025, averaging around 4.0%, close to the lower end of the BOJ's tolerance band.
  • Risks to this forecast suggest a lower end-of-year interest rate if another extreme weather event impacts Jamaica. Furthermore, the country remains susceptible to external factors, and Jamaica's hurricane season extends through November.

(Source: Fitch Solutions)