The Rate and the Rebuild

The Bank of Jamaica raised its policy rate by 50 basis points to 6.0 per cent, effective 29 September. Its Monetary Policy Committee voted unanimously at meetings on 24 and 25 September. In August the same committee held the rate at 5.50 per cent, and Governor Brian Langrin's statement of 29 September gives the reason: inflation then was being driven primarily by temporary external and administrative factors. Prices kept rising. Headline inflation reached 7.9 per cent in August on the Statistical Institute's measure, as the Bank's release reports, the third consecutive month above the 4.0 to 6.0 per cent target range. Core inflation held at 5.2 per cent. The release lists what changed. Commodity prices have moved towards the assumptions of the Bank's severe scenario as tensions in the Middle East and the Russia-Ukraine conflict escalated. El Niño is cutting crop yields. The US Federal Reserve raised its target range by 25 basis points to 3.75 to 4.0 per cent. Businesses' inflation expectations twelve months ahead rose to 7.3 per cent in July from 6.7 per cent in June, and that is the number the decision is aimed at. One more reason sits in the release. It expects domestic demand to add to inflation through recovery spending by the Government of Jamaica. That is a claim about the budget, and the budget has its own referee.

Jamaica's Independent Fiscal Commission published its Statement on Fiscal Performance for April to June on 11 September. On capital spending it points the other way. The specified public sector, which is central government plus the self-financing public bodies, budgeted J$184.9 billion for capital expenditure in FY2026/27. It spent J$27.6 billion in the first three months, 14.9 per cent of the allocation, and J$17.3 billion, or 38.5 per cent, below budget for the quarter. Central government was J$3.9 billion short of its capital plan, a gap of 22.0 per cent. Public bodies were J$13.4 billion short, led by the National Housing Trust, the Port Authority and the Airports Authority. For central government, the Commission traces the gap to procurement delays from supply-chain bottlenecks it links to the US-Israel-Iran War, slow renovation at the Western Children and Adolescent Hospital and slow progress on the national identification system. The National Reconstruction and Resilience Authority holds a J$30 billion allocation, and the Commission expects its impact to be minimal in FY2026/27. The rebuild the Bank is bracing for has barely started to spend.

Pay is the spending that is coming. The Government signed a 2025 to 2028 wage agreement with the Jamaica Confederation of Trade Unions on 27 August. It gives every government employee a one-off, tax-free J$80,000 for FY2025/26, raises pay 5.0 per cent in each of FY2026/27 and FY2027/28, and restores a 2.5 per cent performance increment. The budget had been built on the earlier offer of 2.5 per cent a year. The Commission says it cannot assess the cost because the Ministry has not supplied it, and it is unsure whether the J$42.8 billion contingency for wage rates and retroactive payments is enough. Wages and salaries already took 13.2 per cent of GDP in FY2025/26, against 8.8 per cent in FY2021/22, before the fiscal rule on wages was abolished. The Commission also records the Minister's statement that other planned projects would be executed more slowly because of the agreement. Public spending is tilting towards payroll and away from construction. A pay rise reaches household budgets on the next pay date. The Bank's release says businesses expect wage pressures, and the Governor names costs embedded in wages and prices as the second-round inflation the decision is meant to stop.

The quarter's revenue shows the other side of the same prices. Central government ran a deficit of J$23.8 billion against a programmed J$14.5 billion, and its primary surplus was J$17.9 billion against a target of J$31.9 billion. Tax revenue came in J$18.8 billion short. Part of that is timing, because companies paid corporate income tax in March that the budget expected in April. The Commission had also warned before the budget year began that the revenue forecast was optimistic because it over-projected inflation after Hurricane Melissa. Inflation of 6.7 per cent in June was below the forecast that underpinned the budget, and lower prices than planned meant a smaller nominal tax base. Now the Bank is raising its rate to slow those prices further. The debt ratio has still come in below plan, and the Commission says stronger-than-projected output supports a more favourable path. February's Fiscal Policy Paper projected debt at 68.9 per cent of GDP for end-FY2025/26. The Commission puts the actual ratio at end-March at 65.6 per cent. The Caribbean Debt Tracker carries Jamaica at 65.8 per cent for 2026 on the IMF general government measure, a different basis. Fiscal rules stay suspended to end-March 2027, and the Commission notes that no legislated timeline yet returns the ratio to the 60.0 per cent ceiling.