BOJ flags two quarters of above-target inflation, signals readiness to raise rates

The Bank of Jamaica (BOJ) expects inflation to climb above its six per cent target ceiling for at least two consecutive quarters and warned it stands ready to adjust interest rates if price pressures prove persistent.

"Inflation in Jamaica is therefore forecast to trend upwards over the June and September 2026 quarters beyond the 6.0 per cent upper limit of the Bank's target range. This will be mainly driven by supply and cost pressures," said BOJ Governor Richard Byles on Tuesday at the BOJ's quarterly monetary policy press conference in Mandeville.

Last week, the BOJ's Monetary Policy Committee (MPC) voted unanimously to hold the policy rate at 5.50 per cent. "The MPC is prepared to adjust its monetary policy stance if the conflict in the Middle East is protracted, resulting in sustained price increases," Byles added.

Headline inflation stood at 4.3 per cent in April 2026, within the bank's four to six per cent target range, but the BOJ warned that rising energy costs triggered by Middle East geopolitical hostilities will push inflation beyond the upper limit. Risks to the forecast, Byles said, are "skewed to the upside".

The inflation pressure stems from damage to oil and gas infrastructure in the Middle East and disruption to shipping through the Strait of Hormuz. Rising crude prices are expected to push electricity costs higher in Jamaica, with domestic gas prices already elevated. Higher energy and transport costs are then expected to trigger second-round price increases in food, personal care, and household maintenance items.

Compounding the outlook, the BOJ now forecasts a contraction in real GDP of between one and two per cent for fiscal year 2025-26, as the confluence of the external price shock and Hurricane Melissa's lingering economic damage weighs on domestic activity. Recovery to growth of between one and three per cent is projected for 2026-27 and 2027-28.

"The main upside risk is a more extended and broader conflict in the Middle East, resulting in further increases in international commodity prices and their subsequent impact on domestic prices. In addition, adverse weather conditions, including the effects of El Niño, could place upward pressure on agricultural prices. Higher-than-projected inflation expectations could also contribute to inflationary impulses," Byles said.

Post-hurricane reconstruction spending will add demand-side pressure to an economy already absorbing an external cost shock, while Jamaica's current account surplus is projected to narrow— driven by higher fuel import costs, reconstruction-related imports, and reduced tourism earnings.

To stabilise the foreign exchange market, the BOJ sold US$1.3 billion through its B-FXITT intervention facility over the 12 months to end-April 2026, US$200 million more than the prior period. The Jamaica dollar had nonetheless appreciated 0.5 per cent year-over-year as at May 19, against a depreciation of 1.7 per cent a year earlier. Gross international reserves stood at US$6.5 billion, equivalent to 139.6 per cent of the adequacy benchmark. The B-FXITT — the Bank of Jamaica Foreign Exchange Intervention and Trading Tool — is the mechanism the BOJ uses to manage foreign exchange market operations.

Byles confirmed that the BOJ's forecasts already incorporate an expected increase in public passenger vehicle fares, even though the amount and timing remain unannounced. "We understand and appreciate that there are going to be pressures…I don't know what the amount of the fare increase might be or when, but we have a general estimate that we have included in our forecast," he said.

luke.douglas@gleanerjm.com