More rate hikes possible, economist warns after BOJ move

ECONOMIST Keenan Falconer expects the Bank of Jamaica (BOJ) could raise interest rates again if inflation remains high, describing Monday’s half-point increase as more aggressive than he had anticipated. “I think the BOJ’s decision to raise rates was inevitable, albeit more aggressive than I initially anticipated. Given the extent of acceleration in inflation over the last two months, I’m not surprised it has taken this proactive stance,” Falconer told the Jamaica Observer.

The BOJ raised its policy rate from 5.5 per cent to 6.0 per cent, effective Tuesday. It is the bank’s first rate increase since November 2022 when it raised the rate to 7.0 per cent at the end of an earlier campaign to contain inflation. Rates were subsequently reduced, most recently in February this year, before the BOJ held them steady through August.

Falconer said the bank had little room left to wait. “At best, the bank could have only afforded one more rate cycle without adjusting its benchmark rate. If current inflationary pressures persist, I expect more tightening in the near to medium term,” he said.

The central bank attributed the latest rise largely to drought-driven increases in vegetable prices and the effect of higher international commodity prices on petrol. The BOJ said its decision to hold rates in August was appropriate based on the risks it saw then. Since that meeting, it said, escalating tensions in the Middle East and the Russia-Ukraine conflict have kept commodity prices high, while more intense El Niño conditions threaten to prolong increases in local farm prices.

Inflation is now likely to remain high for longer than the bank had expected. Its concern is that the increases will spread beyond food and fuel. Core inflation, which excludes agricultural food and fuel, stood at 5.2 per cent in August, unchanged from July but up from 4.2 per cent a year earlier.

The BOJ said it was seeing limited signs of higher farm, energy, and transport costs feeding into the prices of processed food and some services. Businesses’ expectations have also risen. In July, they expected inflation of 7.3 per cent over the followin…