Financially Speaking | That stubborn loan rate trajectory
The Bank of Jamaica (BOJ) governor Brian Wynter is an even-toned man with an unflappable smile not given to overt displays of negative emotion.
But in May, he blew a gasket. Not literally, of course. That would be contrary to his prep school upbringing.
Instead, he suggested a consumer revolt, saying maybe the customers of Jamaica's commercial banks should start pressuring them to lower lending rates by exercising their choice to switch.
That was the equivalent of Mr Wynter going all 'Rambo' on the banks' posteriors ... or something. He was a tad upset after the head of the Jamaica Bankers' Association said BOJ's adjustment of benchmark interest rates in April was not likely to lead to a fall in bank lending rates anytime soon, but was likely to result more immediately in a fall in deposit rates or lower returns for savers.
"If that's a reality, then there's certainly no point to policy rate changes," the central bank chief reacted at his subsequent quarterly briefing on monetary policy.
"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."
Well, it stood. The central bank's latest round-up of interest rates show loan rates ticking up in May and ticking up further in June. They dipped in July but remained above the average rate in April when the BOJ rate cuts occurred. On the plus side, deposit rates basically stayed flat.
So here we have the most powerful financial regulator, whose benchmark rate cut was supposed to lead to cheaper credit, being floored by the realisation that bankers do not always feel inclined to follow the central bank's signal. While he's thinking 'monetary transmission', whereby interest rate adjustments pass through the financial system to borrowers, they are focused on margins.
In other words, margins rule. And consumer power in the face of banking spreads has long proved ineffectual. Recall the public and passionate uprising against the multibillion-dollar enterprise known as banking transaction fees that went nowhere.
But now Mr Wynter has got other 'backative'. The International Monetary Fund (IMF) has weighed in. And it sounded like they were saying, or wanted to say - albeit in IMF diplospeak - that Jamaica's banks were too cautious and needed to strap on a pair.
While endorsing the policy actions of the BOJ, the world watchdog acknowledged that the expected impact had fallen short so far.
"The lower policy rate has yet to transmit to higher private-sector credit in part due to weak monetary transmission through an underdeveloped financial sector," read its ninth review of the Extended Fund Facility with Jamaica released two weeks ago.
"Credit growth is also likely hampered by a lack of price competition in the banking sector and the slow shift in banks' business model from lending to the Government towards greater private sector lending," the Fund said.
Here's why the governor's call to action in May was futile. Jamaicans are vocal and willing to stand up for their interests, but exercising market power is effective only where the tenets of the free market work in consumers' favour - one of which would be the ease at which persons can actually switch their service providers in order to force businesses to compete for their patronage.
In the banking arena, the BOJ's own Know Your Customer due diligence requirements tend to be a blockade and a royal pain.
Secondly, the banks all offer long lines, low deposit rates and high loan rates. What, in that scenario, would be the benefit of going in search of references from the right type of people, signing up forms, locating utilities bills, turning up with the right kind of identification, and sitting in the bank for an hour or two to open the account just to have the same type of service that your old bank doled out.
Still something needs to change. The deposit rate estimated at 1.75 per cent/year in July is basically the prevailing average price the banks are paying depositors to 'borrow' their money. The prevailing average lending rate of 16.84 per cent/year is what customers, in turn, are now paying their banks to borrow back their own funds. That's a 15-point spread in favour of the banks.
Bank clients rail against bank spreads from time to time, especially businesses, but have largely accepted the status quo. The revolution won't come from that group.
Perhaps, the banks may be more willing to be less intransigent on lending rates now that the IMF has weighed in from the periphery. Maybe we need more banks. Or maybe it requires Brian Wynter to actually blow a gasket.