THE Bank of Jamaica (BOJ) on Wednesday held the key policy rate at 7 per cent for its third-straight meeting, chided the slow pace of increases in lending and deposit rates but assures the financial system remains safe in light of recent upheavals in the US and Europe which were partly blamed on higher interest rates.

Analysts had expected the central bank to hold rates especially with the Federal Reserve raising its benchmark by only 0.25 per cent last week and with inflation in Jamaica continuing its downward trend, with prices rising by an average of 7.8 per cent in February, the lowest year-over-year increase since December 2021.

Still, chairman of the rate setting monetary policy committee (MPC) Richard Byles and policymakers entered the second policymaking meeting of the year watching keenly what had happened in early March in the United States financial system with several banks collapsing and so sought to assure the local market that Jamaica’s financial system remains stable.

“The MPC noted that the banking system remains sound with adequate capital and liquidity,” it said in notes accompanying its monetary policy decision. The BOJ did not expound on the level of capital adequacy and liquidity in the financial system. However, it told the Jamaica Observer that more data on the financial system will be available from today (Friday, March 31, 2023) with the publication of the Financial Stability Report 2022.

Yet, it indicated that it remains concerned that deposit-taking institutions (DTIs) – commercial banks, merchant banks and building societies – are not raising lending and deposit rates fast enough.

“The MPC also noted that interest rates in the domestic money and capital markets and the term rates offered by deposit-taking institutions have generally increased in line with the policy rate. However, the DTI sector has so far made only marginal adjustments to saving deposits and lending rates,” it said.

Between October 2021 and January 2023, the weighted average deposit rate offered by commercial banks to the public increased by 67 basis points (bps). However, the overall weighted average lending rate to the private sector on local currency loans was 11.6 per cent at January 2023, 12 bps below the rate at September 2021.

The BOJ, however, pointed to preliminary survey data which indicate that these rates will be adjusted upward by marginal amounts in the near future.

In the last few weeks, a number of banks have sent notices to their customers indicating lending rates will be going. The expectation is that higher lending rates will discourage people from borrowing to make purchases, especially for things like houses, cars, furniture or vacations, which will slow the economy and help to bring price increases back in line with the target of keeping annual price increases within the 4 per cent to 6 per cent band. Higher deposit rates should have a similar effect. If banks are giving consumers more on their deposits, then consumers should be encouraged to save more and spend less, again, slowing the economy and sapping the strength out of price increases.

Even with positive developments such as fertiliser costs falling 12.3 per cent from January to February 2023, liquified natural gas prices declining by 34.8 per cent from January to February, oil rising by 0.1 per cent – below the central bank’s projection – and grains prices (wheat, corn, soybean) also increased at a slower pace than expected for the two-month period, the BOJ expressed concern that their effect could be stymied by wage increases.

“In a context where the domestic economy continues to grow, labour market shortages carry the potential for future wage adjustments that can put upward pressure on inflation,” it said while noting that higher inflation could also result from a worsening in supply chain conditions and higher commodity prices if there are further geo-political disruptions.