On Friday, the Jamaica Chamber of Commerce (JCC) announced full support of the Bank of Jamaica’s (BOJ) insistence that adjustments in its policy rates should be passed on to borrowers promptly and without undue delay by the commercial banking sector.

Echoing BOJ Governor Richard Byles, the JCC argued that the transmission of monetary policy into the real economy is essential for the effective functioning of the central bank’s inflation targeting system.

“Ensuring swift and accurate rate adjustments is crucial for helping the Jamaican economy recover from the short-term economic shock caused by Hurricane Beryl. A timely response to monetary policy changes can foster economic stability, encourage investment, and help businesses recover quickly,” the JCC said.

The chamber also agreed that, during periods of rate hikes, commercial banks were slow in raising their lending rates, “which raised concerns within the financial community”.

The chamber argued that with the current lowering of policy rates, “the delay in reducing lending rates signals a need for deeper review of the monetary transmission mechanisms in place”.

It called for the BOJ and the bankers’ association to engage in meaningful discussions to address the inefficiencies in the current transmission model to ensure that the full benefits of policy adjustments are felt by businesses and consumers in a timely manner.

We agree.

A brief look at the BOJ data suggests very weak pass-through of the policy rate to commercial rates on both the upward and downward cycles. One question the BOJ could ask the various private sector organisations is, does their data for commercial credit accord with their members’ experiences during the 2021-2024 rate increases?

One would also need to take a granular look at the different areas of credit, for example, consumer credit, mortgages, commercial credit, etc, to come to a definitive conclusion. Some of this will no doubt reflect a lag, as some part of the existing stock of loans will be at fixed rates, making it potentially misleading for the BOJ to focus only on the average rate, rather than the marginal rate for new loans, which seems to have risen significantly in some areas.

Although much of this information is already in the BOJ’s rather dense reports, we suggest that the bank, in a similar fashion to its very successful globally recognised reggae-themed education campaign on inflation, should regard part of its mandate to further educate the public on interest rates. Scotiabank, for example, seems to be offering very low lending rates for commercial loans, presumably to “prime” clients.

Critically, the JCC also noted that improving access to affordable credit is essential for reversing the long-standing decline in Jamaica’s productivity, thereby ensuring that businesses, particularly small and medium-sized enterprises, can access the necessary financing to invest in their productive capacity. This is critical for fostering long-term growth and competitiveness.

In assessing the BOJ’s point on pass-through, it is important to note that the non-bank financial sector in Jamaica is now bigger than the banking sector in terms of assets. This is also true in developed markets such as the United States. The pass-through of the interest rate rises to the capital markets in Jamaica, which, at the end of 2019, were financing a significant portion of Jamaica’s total commercial credit. This also points to another potential intervention for the BOJ, beyond its welcome ‘know your customer’ initiative, to allow portability of accounts as, unlike in the US, there is no real interbank market for banks to lend excess deposits to their competitors.

Moral suasion anyone?