BANK of Jamaica (BOJ) Governor Richard Byles has hinted that the central bank is contemplating legal recourse to get commercial banks to move interest rates in line with similar movements by BOJ.

“There are things that can be done in law that could help, and that is something that we’re contemplating and that could be more short term,” Byles said Tuesday during an appearance before the Parliament’s Economy and Production Committee.

He was responding to questions from Opposition member Anthony Hylton about why the pass-through mechanism for BOJ’s policy rates does not appear to benefit customers of commercial banks.

Ideally, customers should benefit from lower interest rates on mortgages, commercial and personal loans whenever BOJ lowers its policy rate. But, this has not been happening as commercial bank lending rates remain stubbornly high at an average of 10 per cent.

The BOJ rate was lowered four times last year to six per cent. Banks usually adjust their rates more quickly whenever the BOJ increases its policy rates, prompting Hylton to comment that businesses and households were not benefiting from the lower rates.

“What specifically is being proposed in collaboration with yourself and the Ministry [of Finance] to address the issue? We can’t continue to just wring our hands on a matter of that critical importance,” Hylton said to Byles.

In response, Byles said the problem largely stems from the fact that Jamaica’s banking system is dominated by two large banks of the 11 that are operating on the island.

“By dominating I mean they have approximately 60 per cent of the savings accounts, and that’s the heart and soul of a viable commercial bank, that’s the power that a commercial bank has — the savings deposits,” Byles said.

“The objective in the medium term is to democratise more the banking system in terms of where people save,” the BOJ governor argued, acknowledging that it came down to customers’ choice.

“If they choose to just be with two of 11 institutions it’s very hard for us to tell them not to,” Byles noted. He said there are also certain rigidities that prevent them from moving whenever they want to move.

To this end, BOJ is working to fast-track its EKYC project or ‘know your customer information’, which will allow customers to readily move their accounts from one bank to the next. And BOJ expects that it will be ready to roll out the EKYC in the next 12-18 months.

Meanwhile, Byles pointed out that beyond the commercial banks, the transmission system works and “is quite efficient”. He said that for people holding repurchase agreements, “every time we move our policy rate one way or the other, those rates move”.

“The relationship between our policy rate and the non-DTI [deposit-taking institutions] sector, for those rates, it’s very good. It’s within the commercial banking sector that we find that there is rigidity, that the rates don’t move as efficiently — either up when want them to go up, or down when we want them to come down,” Byles outlined.

Asked by Hylton whether the banks tend to move rates upwards more quickly, Byles said, “Our experience is that what the commercial banks have done in the last two to three years is, new loans have got higher rates but rates on older loans have not moved significantly.”

He said that in addition, savers have not received any better rate, even though inflation has been higher and the policy rate has been much higher.