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Wynter wants commercial banks challenged on lowering of interest rates

Published:Friday | May 29, 2015 | 12:00 AMMcPherse Thompson
File Governor of the Bank of Jamaica, Brian Wynter, will head the new financial stability commitee.
File President of the Jamaica Bankers Association, Nigel Holness.

Any pronouncement by commercial banks that a reduction in the Bank of Jamaica's (BOJ) policy rate would not necessarily lead to a lowering of lending rates should not be allowed to stand, says central bank governor Brian Wynter.

On April 17, the BOJ reduced the rate offered on its benchmark 30-day certificate of deposit from 5.75 per cent to 5.50 per cent.

Responding to comments made by a top banker days later that the central bank's action did not mean loan rates would also be reduced, Wynter said "if that's a reality, then there's certainly no point to policy rate changes".

He added: "... That statement that says the policy rate going down doesn't mean that loan rates will go down, and does mean that deposit rates will go down, that statement should not be allowed to stand."

Wynter addressed the issue during his quarterly press briefing on monetary policy last week, saying then that bank customers ought to use their market power - where they have it - to exercise choice.

The central bank this week further cut its lending rates to commercial banks, merchant banks and building societies by 50 basis points: the interest rate on the Standing Liquidity Facility (SLF) for overnight loans was cut from 9.25 per cent 8.75 per cent; the rate for 14-day repos was reduced from 8.75 per cent to 8.25 per cent, while another overnight facility, the Excess Funds Rate, was adjusted from 11.30 per cent to 10.80 per cent.

monetary policy transmission

Wynter acknowledged at the quarterly briefing that BOJ research does show a lag between reduction in benchmark interest rates and the adjustment of lending rates, but he also said that where the financial system is slow to pass on policy rate changes, it speaks to a problem in monetary policy transmission - the process by which a central bank's monetary policy decisions are passed on, through financial markets, to businesses and households.

Under an ideal monetary transmission system, if the BOJ "move rates by one per cent up or down, then we would expect to see all of that one per cent pass through to other rates and do it pretty quickly," Wynter said, though he declined to define what the central bank considered 'quick' in the circumstances.

"The truth is, no monetary transmission process is perfectly efficient. Neither is ours. But the degree to which that statement is true is the degree to which we have a more serious problem with the monetary transmission mechanism which, then, we need to identify what we are going to do to change those things," the governor said.

In April, president of the Jamaica Bankers Association, Nigel Holness, said the central bank's 25 basis points reduction in the benchmark rate was indicative of the direction the BOJ believed interest rates should be trending, but that the market may or may not adjust immediately.

Holness, who is also managing director of CIBC FirstCaribbean International Bank Jamaica, also said savers may see a dip in their deposit rates.

"I don't believe the statement as it stands fully describes reality," Wynter said of Holness' comment.