AHEAD of its next monetary policy decision this Friday, the Bank of Jamaica (BOJ) continues to express concern that almost a year since it has paused interest rate hikes to allow the impact to take effect, banks are still slow in doing their part to bring inflation under control.

The central bank, cognisant of the time it takes for monetary policy decisions to impact the broader economy, set about raising rates two years ago with the hope that early rate hikes would feed through the economy by now, given its own forecast that its monetary policy decisions take up to eight quarters, or two years, to take effect.

However, after increasing its key policy rate from 0.5 per cent in September 2021 to 7 per cent by November 2022 — a full 6.5 per cent before the almost-year-long pause up to now — “the weighted average lending rate offered by commercial banks to the public over the same period fell by 0.06 per cent”, the BOJ pointed out in minutes of its monetary policy committee (MPC) meeting in August. “The hike in mortgage rates on existing and new loans provided by deposit-taking institutions (DTIs) increased by 0.17 per cent and 0.81 per cent, respectively, for the review period,” the central bank continued. It said a survey of selected commercial banks indicates some increases in deposit and loan rates by these financial institutions in June and July 2023.

On the other hand, it said “the weighted average deposit rate increased by 1.29 per cent and the weighted average time deposit rate increased by 2.66 per cent”, far less than the central bank would have liked to see or what’s needed to encourage people to save more (and spend less), with the ultimate aim being to curtail inflation to the four to six per cent range set by the Government. Inflation in August was 6.8 per cent but is expected to temporarily dip into the target range in the next quarter.

Seeing lending and deposit rates hardly moving in comparison to the hikes in the policy rate, the BOJ re-emphasised that “weak competition within the domestic banking sector continues to be an impediment to effective monetary policy”.

The Jamaica Observer reached out to the BOJ for clarity on the statement, and though during the past the central bank sent out hints it would welcome an increase in the number of DTIs in Jamaica, it said the most recent statement about weak competition does not necessarily mean it is subtly signalling the need for more DTIs with the hope that, through increased competition, they will enhance the transmission of its monetary policy decisions, especially in giving incentives for people to save more.

Instead Dr Wayne Robinson, deputy senior governor at the BOJ, told the Business Observer, “With weak competition the incentive for customers to shop around is less, and so prices — in this case interest rates offered by banks — tend to be sticky and so they don’t respond as desired to monetary policy signals.”

Robinson pointed out that “of course there are other factors that affect interest rates” but outlined that increasing competition could come with it being easier for consumers to move accounts across banks.

“One of the things we need, and which we are pursuing, is to enable customers to move their accounts from one bank to another more easily,” Robinson added.

Still, despite the central bank saying it has been working on strategies to facilitate bank account portability to boost competition in the banking sector, there are indications that such a desire would take some time to be fulfilled. The indication came from Robert Stennett, deputy governor with responsibility for the research and economic programming division and financial stability division, in a JIS News interview published at the end of May.

“We admit that this is going to be a long-term effort because it’s going to take a lot of time to develop the right strategies, a lot of time to make the necessary amendments to the law — if there so needs to be — and a lot of time to sensitise and make customers aware of this facility,” Stennett was quoted as saying by JIS News.

For now it has turned to appealing to customers to shop around for better deposit rates.

“What the central bank has been doing recently is placing the information about interest rates and deposits in the public media so that the public can see which bank is paying interest rates of say ‘X’ and ‘Y’ per cent,” Robert Stennett, deputy governor of the BOJ, was quoted as saying in the same JIS News report in May this year.

The hope is that by encouraging greater savings, incentivised by higher deposit rates, less money available to be spent will help to slow the economy enough to contain price increases within the target range, long enough for the BOJ to start reversing rate increases. Other factors, including but not limited to the actions of the Federal Reserve, will also influence how quickly the BOJ will start to cut rates. Just last week it voted to pause further hikes to its benchmark rates, but they are still at a 22-year high and are expected to rise again before the end of this year. The BOJ tries to keep its policy rate above that of the Federal Reserve to mitigate against capital flight. Since capital is usually invested where it earns the highest return, the theory is that higher rates in Jamaica will encourage those with capital to keep it in the country. This also has the impact of helping to keep the currency stable and is one of the reasons behind the remarkable stability seen in the currency over the last two years in which the US dollar has been valued between $151 and $154, rather than its average annual 5 per cent slide recorded before the stability.

Still, the BOJ has had some success away from the commercial banking scene and more in the domestic money and capital markets.

“Lending rates offered/asked by primary dealers in the inter-dealer market increased by 4.40 percentage points over the reference period,” the central bank acknowledged as it noted that in the securities dealers sector, “the effectiveness of monetary policy continues to indicate a relatively strong, lagged pass-through”.

“Given the dynamic structure of international financial markets, some members suggested exploring the effectiveness of the pass-through in the more competitive segments in the US financial system would enrich the existing study.”

Additionally, it was noted that focus should be given to how quickly monetary policy actions impact the domestic financial sector, and not only the magnitude of the response. The committee also believes it would be useful to examine the effect of monetary policy actions on overall credit terms, and not only in relation to interest rates.