THE Bank of Jamaica (BOJ) has slammed commercial banks, calling them unreasonable for the slow pace they are taking to increase interest rates on customers’ deposits while milking the same funds for their own coffers.

Between October 2021 and December 2022 the central bank hiked its policy rate from 0.5 per cent to 7 per cent, and has been encouraging commercial banks to follow suit in increasing both their lending rates and deposit rates as part of the fight against runaway inflation.

Higher loan rates discourage borrowing while higher deposit rates encourage saving. Together both should act to cut spending and help to cauterise price increases. However, deposit-taking institutions (DTIs) have been slow to raise deposit rates, frustrating the central bank’s efforts to get inflation down quickly.

“We’ve been consistent in encouraging the banks to raise both the rates that they pay their savers as well as rates to creditors, people who they lend funds to. And this is our objective in fighting inflation because what we want to do is to take the edge off of the exuberance in the economy. If you watch what the Fed is doing in the United States, it’s a similar thing,” Richard Byles, governor of the BOJ, said in response to a query from the Jamaica Observer at the central bank’s recently held monetary policy press conference.

“The banks have made some progress in the direction that we have indicated to them. Deposit rates have come up, I believe, about 59 basis points, but that is still minimal. And lending rates haven’t come up at all,” Byles continued.

BOJ data show banks pay between 0.27 per cent and 1.46 per cent on its customers’ savings. At the same time, local currency deposits grew 12.6 per cent.

But a senior banker in one of the country’s commercial banks, who requested anonymity to speak freely about the issue of interest rate paid on deposits, told Sunday Finance that the BOJ’s prod for them to hike interest rates paid on deposits is unreasonable, given that most of the funds consumers have in savings accounts are to conduct daily transactions and are not necessarily savings in the true sense of the word.

“Let me tell you one of the things that the BOJ is not willing to hear,” the person said. “You don’t have a lot of people saving, and they are not saving because the interest rate is not attractive. They are not saving because they are just living hand to mouth,” the person continued. It was pointed out that most of the money which goes into traditional savings accounts are really used to conduct transactions, and do not stay very long in such accounts.

But when that matter was put to the central bank, it was not having any of it.

“A large portion of the funding of the DTI’s for loans comes from those very accounts that the banks are talking about are transactional. So they don’t want to pay a high rate on those accounts but they use it to fund loans that they charge 11 per cent, 12 per cent, 13 per cent. So you judge which one is reasonable or not,” Byles said.

His Deputy Governor Jide Lewis provided more details, saying in excess of 75 per cent of customers’ deposits are used to make loans.

“Basically what that means is: For every dollar of loans that’s granted, 75 cents of it is funded from deposits — so it’s a significant proportion. Of course the rest of it could be funded from interbank borrowings etc, but the point is that core source is savings deposits that is going into facilitating onlending. In fact, what we’re observing in the system is that loan growth is pretty robust. Loan growth for the year has been around 13 per cent, which would have been a significant increase.

“So banks not only have deposits and use it as a base to fund their lending activities, but they’re lending even more. So I think the argument that says that these are just transactional accounts that they have and therefore they shouldn’t be interest rate-sensitive is a little dubious because the fact is, they have it available to use to facilitate their business, which they have the right to do because their licence allows them to do what is called intermediation, which is to take deposits and make loans. So, I think we have to look at it on the balance and let the data speak for itself,” Lewis added.

“When you look at total funding throughout the financial sector, you will see that it has responded very strongly to our policy rates. What has not responded is the savings account rate and any operating accounts in the commercial banks; those two have been very sticky. And all I say is that we have hundreds of thousands of small savers in the commercial banks. It is incredible to me that the banks have seen us move our rate from point five to seven and all they have given is a little bit more than point five to their savers. I just think that that is not reasonable, and the banks need to justify that to their customers,” Byles added.

With banks being slow to raise rates, the BOJ has indicated it will take further steps to force the issue. In February it announced that it will increase the cash reserve requirement (CRR) — that’s the portion of all deposits that should be held in the central bank and will be unavailable for lending — on April 1 by 1 percentage point. The increase is the same amount for both Jamaican-dollar and foreign currency accounts held in deposit-taking institutions. The domestic CRR will be increased to 6 per cent and the foreign currency CRR will move to 14 per cent.

The central bank said that action should take $10 billion out of the system from Jamaican-dollar accounts. From foreign currency accounts the reduction will be between US$44 and US$45 million.

“Banks will assess if it will impact their cost of fund enough to increase lending rates,” Robert Stennett, deputy governor of the central bank, said.

“I think it’s important to just keep in mind why we’re actually doing this. We’re not trying to raise interest rates because we want high interest rates. We’re trying to manage inflation — and our projection is that inflation will fall to the 4 per cent to 6 per cent target by the end of this fiscal year. There are risks to that on the upside but we have to take all the actions necessary to ensure that those risks are mitigated and to ensure that inflation comes back down. We all know the impact that inflation has on the poor and productive sector and on the society as a whole, and the country cannot grow on a sustained basis in a high-inflation environment. So, that is why we need to try and take that inflation out and that is why we have adopted, or continue to adopt, this standard.”