Tue | Aug 22, 2017

BOJ rate but might not mean cheaper loans, says JBA president

Published:Sunday | April 26, 2015 | 4:00 AM
File President of the Jamaica Bankers Association, Nigel Holness.

Nigel Holness, president of the Jamaica Ban-kers' Association (JBA) and managing director of CIBC FirstCaribbean International Bank Jamaica, says consumers who might be expecting an early pass-through in the recent rate cut by the central bank should manage their expectations.

At the same time, he warned that account holders may see a cut in deposit rates, which would mean less returns on their savings.

The Bank of Jamaica cut a quarter of a percentage point, or 25 basis points (BPS), off its benchmark rate to 5.5 per cent on April 17.

"It should be noted that a 25 bps reduction by the central bank is indicative of the direction the central bank believes interest rates should be trending. The market may or may not adjust immediately," said Holness in response to Sunday Business queries on what borrowers should expect from the rate adjustment.

The new JBA president, who was elected to the position this month, said each bank manages its own portfolio and establishes internal interest rate "along the benchmark curve", and that this is done in accordance with their individual mandates, making it "difficult to ascertain when or if borrowers will enjoy a 25 bps reduction in their borrowing costs".

He added: "Each risk is assessed on its own merit. There may be some lowering of interest rates on some types of loans, however, this has to be viewed in light of the investment opportunities that may exist within the economy."

The JBA president noted that, typically, banks will assess the liquidity levels within the market, the risk of the credit, which could demand a rate premium or discount, "and most importantly, the bank's cost of funds - the cost of borrowing within the market. These factors will determine whether an institution lowers or maintains its current interest rate structure on both its deposits and loans portfolio," he said.

Still, he acknowledged that the message being sent by the central bank, with the cut in the benchmark rate on its 30-day certificate of deposit, is that lending rates should be reduced, and that the BOJ's actions are in line with its mandate of using monetary policy to set interest rates for overnight funds and short-term financing facilities, thereby controlling inflation.

stimulate growth

"This action of reducing the 30-day money-market rate sends a signal to the market that interest rates need to be adjusted. This is a tool that forms the base on which market interest rates are built," said Holness.

"In essence, the response of the BOJ signals to players that liquidity conditions are improving and, in general, this will help to stimulate economic growth. The interest rate adjustment by the central bank also reflects their expectation that inflation will remain low in the upcoming fiscal year," he said.

While falling consumer prices will mean a reprieve from the average annual eight per cent inflation in recent years, said Holness, he warned that savers may see a down-tick in deposit rates.

"With any reduction in interest rates, there is always the possibility of lower interest rates being offered on savings products," said the JBA president, who believes that any meaningful adjustment in the short term - whether to cut deposit rates or loan rates - would likely be