BANK of Jamaica (BOJ) Governor Richard Byles continues to express frustration at the lack of competition in the banking sector and the impact that it has had on efforts to keep inflation under control.

Byles, who was speaking at the central bank’s quarterly monetary policy press briefing on Tuesday, said inflation numbers could be lower than the 5.3 per cent rate it was in April if the two dominant players in the banking landscape — National Commercial Bank and Bank of Nova Scotia — adjusted interest rates as the central bank would have liked. The BOJ hiked its policy rate from 0.5 per cent to 7 per cent between October 2021 and November 2022 and has frozen it at that level since then, with the hope that banks would follow suit, but the two largest players in the market have not been playing along as expected.

Seeing the two being reluctant to move rates on both loans and deposits by any significant amount — that would make taking loans more expensive and force consumers to cut back spending enough to slow the economy and cause prices to decrease — Byles said the BOJ could have taken further action to force the issue by continuing to hike its policy rate. He, however, acknowledged that path was not followed because of the economic and social cost higher interest rates would have had on the average Jamaican.

“Lower inflation is desirable, but is difficult to achieve in the near term for a number of reasons. The first is that Jamaica has a weak monetary transmission mechanism,” he said.

The monetary transmission mechanism is the process through which the central bank uses its monetary policy, such as changing interest rates, to impact the economy. It is done by banks following the lead of the central bank to hike rates when policy rates are increased and to lower rates when policy rates are cut.

“Among the primary constraints to the transmission mechanism in Jamaica, particularly via the credit channel, is limited competition in the banking sector,” Byles said, adding that the dominant players — the National Commercial Bank and Scotiabank — hold high levels of low-cost saving deposits, which makes their funding cost less sensitive to the central bank’s policy actions.

By way of example, the governor said that an assessment done by the BOJ on the existing system would require the central bank to raise interest rates to double digits to contain inflation close to 4 per cent, but has refused to do so because if the dramatic increases in financing costs and reduced financing opportunities that would cause.

“These actions would also reduce the Government’s ability to achieve the targeted reduction in the debt-to-GDP ratio by pushing up interest costs on GOJ (Government of Jamaica) debt. It is also of primary importance that the targeted rate of inflation enables nominal GDP to grow at a rate that is consistent with the country’s debt reduction strategy,” Governor Byles said.

Targeting a lower inflation rate is also hampered by low factor productivity, Byles said, noting that a highly productive economy produces goods and services at lower unit costs, which dampen inflation.

“On the flip side, lower productivity means that goods and services will become relatively more expensive over time, which makes it more difficult to reduce inflation. Finally, a significant part of the consumer price index (CPI) — the ‘basket’ of goods and services that people buy, includes goods and services for which the prices are regulated by the Government,” he said.

That includes PPV fares and utilities.

“In this regard, large and unpredictable regulated price adjustments complicate the job of the central bank in containing inflation,” he continued.

Governor Byles says the BOJ remains committed to pursuing measures to improve the transmission mechanism to facilitate greater and quicker pass-through of policy rate adjustments in the banking system.

The commitment comes as the BOJ welcomed a second consecutive month of inflation being within its target range, though it said that June inflation could be above the 6 per cent upper band. Inflation in April was 5.3 per cent, down from 5.6 per cent in March and within the 4 per cent to 6 per cent band it is mandated to achieve by the minister of finance.

The BOJ has indicated that if the trend continues, it could start cutting its policy rate later this year.