OUTGOING Bank of Jamaica (BOJ) Governor Richard Byles says the central bank must play a more active role in ensuring its interest rate decisions reach borrowers and savers, rather than relying entirely on commercial banks to pass the changes on.

Byles said BOJ should study its hands-on participation in the foreign-exchange market as a possible model for fixing a system in which central bank rate changes do not reliably lead to corresponding changes in the rates offered to customers.

BOJ’s policy rate is the benchmark interest rate it uses to influence borrowing, saving, economic activity and inflation. The process through which that rate reaches customers and the wider economy is known as monetary transmission.

“Monetary transmission today is left entirely up to the DTIs,” Byles told the Jamaica Observer, referring to deposit-taking institutions. “We set a policy rate, they should be following that policy rate, up, down. Not happening. Hasn’t happened effectively, I would say.”

Byles, who leaves office on August 18, offered no specific mechanism for an expanded BOJ role. His proposal nevertheless goes beyond the central bank’s existing efforts to encourage banking competition and leaves his successor to determine what more BOJ can do when its rate changes do not reach customers quickly or fully.

Byles said the foreign-exchange market provides a possible starting point. BOJ buys and sells foreign currency and uses other measures to help maintain an orderly market. He said its involvement has helped to build confidence that foreign currency will be available when required, reducing the incentive to hoard it.

“And that market works because Bank of Jamaica plays a big role in it,” he told Business Observer.

“It wasn’t just left up to the foreign-exchange traders to operate. The central bank played a fundamental role, and I believe in monetary transmission the central bank will have to find a fundamental role to play.”

Byles said developing any such role would require “deep thought” inside BOJ and consultation with financial institutions. Asked whether the central bank could use existing banking legislation or persuasion to compel institutions to change their rates, he said BOJ does not currently have the legal authority to do so.

Two banks dominate

Byles linked his proposal to the concentration of Jamaica’s banking market, saying the dominance of two banks gives them significant influence over how fully and quickly BOJ rate changes reach customers.

Asked whether their market power could weaken BOJ’s interest rate signal, he replied: “Yes. If they do not follow our policy rate up the curve and down the curve, they do have that power,” Byles said.

He did not identify the institutions during the interview. However, BOJ figures for individual banks at March 2026 identify National Commercial Bank Jamaica Limited and Bank of Nova Scotia Jamaica Limited as the two largest commercial banks by assets, deposits and loans.

Together, they accounted for 60.6 per cent of commercial bank assets, 57.8 per cent of deposits and 55.3 per cent of net loans, broadly supporting Byles’s description of two institutions holding approximately 60 per cent of the commercial banking market.

The gap between the two banks and their competitors was wide. NCB held 30.2 per cent of commercial-bank deposits and Scotiabank 27.7 per cent, while the next-largest institution held 11.1 per cent.

The figures are based on unaudited financial returns submitted by the institutions to BOJ.

Borrowing costs resist BOJ cuts

BOJ’s figures also show that changes in its policy rate have not passed evenly to customers.

During 2025, the central bank reduced the policy rate from six per cent to 5.75 per cent. Rates on short-term market instruments and Government Treasury bills generally followed it down.

Customer rates moved differently.

The weighted average deposit rate fell by 0.57 percentage points to 2.14 per cent by December 2025. However, the weighted average lending rate rose by 0.09 percentage points to 12.44 per cent.

Average returns to depositors therefore declined even as the average cost of borrowing edged higher.

BOJ’s 2025 Financial Stability Report said one reason for the weak response was that many existing loans carried fixed rates and would not change immediately. Variable rate loans were also being adjusted slowly.

Byles did not portray the banks’ response simply as resistance to BOJ. He said fixed-rate loans had protected some borrowers from earlier policy rate increases, while banks were also reluctant to impose rates that could leave customers unable to repay their debts.

“They did move their rates, somewhat, especially on loans that are variable rate,” he said.

Bank of Jamaica’s headquarters in downtown Kingston.

“But generally, they have an interest in making sure that their customers don’t experience rates that will make them insolvent, as well as they want to protect their market share.”

Banking concentration is also not the only obstacle.

The International Monetary Fund (IMF) has pointed to Jamaica’s limited alternatives to bank financing, the widespread use of foreign currency in the financial system and weak competition among financial institutions.

Large remittance inflows can also give banks ample funds to lend, making them less dependent on BOJ’s policy rate when determining what they charge customers.

Even so, Byles said the central bank could not depend on persuading individual bank executives to adjust their rates.

“That transmission system can’t depend upon jawboning and talking only,” he said. “It must depend on imperatives — objective imperatives.”

Competition reforms under way

Byles did not call for Jamaica simply to license more banks, saying the priority should be stronger competition and a more level playing field.

“It shouldn’t depend on me trying to get institutions, CEOs, to move interest rates,” he said. “It should depend on competition that requires them to move their rates.”

BOJ has been pursuing measures intended to make it easier for customers to compare financial institutions and transfer their business.

Its electronic know-your-customer, or e-KYC, initiative would allow participating institutions to securely share customer identity and verification information. That would reduce the need for people to repeatedly submit the same documents when opening accounts at different institutions.

BOJ is seeking a technology provider for the system, with bids due on August 14.

A separate Account Portability Project is intended to make switching institutions easier, while a comparative banking platform is being developed to help customers compare services.

The IMF has endorsed those measures, saying easier account opening and greater freedom for customers to move their money should strengthen competition.

Byles, however, said those reforms did not remove the need for BOJ to examine its own role, particularly since it became independent in setting monetary policy in 2021.

“The way in which central banks do that is through monetary policy and so that transmission system has to be effective and efficient, otherwise it compromises your mandate,” he said.

Strong banks, different problem

Byles stressed that he was not questioning the stability of Jamaica’s banking system.

Interim BOJ figures for March 2026 show that the country’s 11 deposit-taking institutions held $3.10 trillion in assets, $2.29 trillion in deposits and $1.62 trillion in gross loans.

The institutions’ capital adequacy ratio — a measure of their financial cushion against unexpected losses — stood at 14.5 per cent, above the legal minimum of 10 per cent. Loans overdue for at least three months accounted for approximately 2.3 per cent of total loans.

Byles described the institutions as having strong capital and sufficient assets that could be readily converted into cash. He said he had no immediate concern about their ability to withstand financial pressure.

His concern is whether that stable banking system is competitive enough to carry BOJ’s interest rate decisions through to customers.

The question is particularly relevant as annual inflation stood at 6.7 per cent in June, above BOJ’s four-to-six-per-cent target range. The policy rate is currently 5.50 per cent, with the next interest rate decision scheduled for August 19 — one day after Byles’s departure.

Byles said fixing how BOJ’s decisions reach customers was the first major challenge he hoped his successor would address.

“That’s what Bank of Jamaica is about — managing inflation,” he said. “And if the tool you have to do it is imperfect, you’ve got to fix that.”