Bank of Jamaica raises policy rate to 6% as inflation pressures persist

The Bank of Jamaica (BOJ) has raised its policy interest rate by 50 basis points to 6% as it moves to contain persistent inflationary pressures stemming from higher commodity and agricultural prices and ongoing geopolitical conflicts.

The Monetary Policy Committee (MPC) unanimously approved the increase during meetings on Sept. 24 and 25. The new rate took effect Sept. 29.

The decision reverses the MPC's decision in August to leave the policy rate unchanged. The central bank said the earlier decision was appropriate based on the risks assessed at the time, but conditions have since deteriorated.

According to the BOJ, escalating tensions in the Middle East and the Russia-Ukraine conflict have contributed to persistently high commodity prices. At the same time, worsening El Niño conditions are expected to prolong pressure on domestic agricultural prices by reducing crop yields.

The central bank also said global financial conditions have tightened more rapidly than previously projected amid elevated uncertainty.

The MPC said these developments mean inflationary pressures are likely to persist for longer than initially anticipated.

“An increase in the policy rate is, therefore, necessary at this juncture to limit second-round effects,” the BOJ said.

The central bank said the move is intended to prevent elevated near-term inflation from becoming embedded in inflation expectations and delaying the return of inflation to its target range.

Inflation rises to 7.9%

The Statistical Institute of Jamaica reported headline inflation of 7.9% in August, up from 7.5% in July and 1.2% in August 2025.

August marked the third consecutive month in which inflation exceeded the upper limit of the BOJ's target range of 4% to 6%.

The BOJ said the August increase was mainly driven by drought conditions that affected agricultural production and pushed up prices, particularly for vegetables. Higher international commodity prices also contributed to increased petrol costs.

Core inflation, which excludes agricultural food and fuel prices, remained at 5.2% in August, unchanged from July but above the 4.2% recorded a year earlier.

The central bank said the increase in core inflation over the past year reflects emerging, although still limited, second-round effects on processed food and selected services.

These pressures have been linked to higher domestic agricultural prices and increased costs for imported commodities, particularly energy and transportation.

Inflation expected to remain elevated

The BOJ expects headline inflation to continue rising in the near term before returning to its target range by mid-2027, depending partly on how long the conflicts in the Middle East and Ukraine continue.

Core inflation is also expected to remain above the target range during this period, particularly if geopolitical tensions persist under the central bank's severe scenario.

The inflation outlook also incorporates the impact of higher international commodity prices on domestic energy and transportation costs, as well as increased agricultural prices associated with El Niño and reduced crop yields.

The BOJ said increased domestic demand could add further inflationary pressure, including spending associated with the government's recovery efforts and the normalization of economic activity in sectors affected by Hurricane Melissa.

The central bank said risks to inflation over the next eight quarters remain skewed to the upside, meaning inflation could exceed current projections.

Businesses' inflation expectations 12 months ahead rose to 7.3% in July from 6.7% in June. The BOJ also noted indications of potential wage pressures.

Higher-than-expected agricultural prices resulting from worsening production conditions and unusually high temperatures could further affect inflation expectations, while stronger-than-anticipated domestic spending could create additional price pressures.

The central bank said weaker consumer purchasing power could provide some offset by reducing demand.

Global rates also rise

The BOJ also pointed to tightening global financial conditions as a factor in its decision.

The US Federal Reserve increased its federal funds target range by 25 basis points to 3.75% to 4% in September, citing higher inflation and uncertainty in the United States. Other major central banks have also raised interest rates.

Despite the external pressures, the BOJ said Jamaica's international reserves remain healthy and provide a buffer against heightened geopolitical uncertainty by supporting the availability of foreign exchange.

The central bank expects the foreign exchange rate to remain relatively stable.