Fri | Jun 22, 2018

Banks now following BOJ lead on rate cuts, says Robinson

Published:Friday | February 2, 2018 | 12:00 AM
Senior Deputy Governor of the Bank of Jamaica, John Robinson.

The Bank of Jamaica is optimistic that lenders will continue to follow the central bank's lead on interest rate and cut the cost of credit to borrowers.

For two years, the BOJ has mapped a decline in loan rates by commercial banks and is predicting that the cut in its own policy rate - to 3.25 per cent last November and a further reduction to three per cent on January 18 - will lead the banks to offer even cheaper loans to the market.

"The lowering of BOJ's policy rate has facilitated reductions in the lending rates of local commercial banks and building societies over the last two years," BOJ's Senior Deputy Governor, John Robinson, told the Financial Gleaner.

Finance Minister Audley Shaw also expects lending rates to trend down because of the policy rate adjustments, but he believes the cost of credit is still too expensive and is prodding the banks to bring loan rates down to single digits. BOJ data indicates that loan rates are hovering at just below 15 per cent, on average.

"I want Jamaica to get used to single-digit interest rates. For far too long, we have been bred on this notion of high interest rates. In the '90s, we averaged 53 per cent. This was the average interest rate for 10 years and it went up to as high as 120 per cent when you factored in penalties and overdraft," said Shaw while addressing the annual meeting of the Jamaica Used Car Dealers Association last week.

The finance minister couched his demand as a growth imperative.

"The macroeconomy is going in the right direction. Interest rates are going down. In 2007, the average interest rates in Jamaica were 20 per cent ... now we have a new threshold. The new threshold is under 10 per cent, and that includes interest rates for people who are borrowing for productive purposes," he said.

The BOJ's two rate cuts in a span of two months were meant to facilitate that growth imperative, according to Robinson, who said the expansion of the economy had been weaker than expected.

Between February 2015 and June 2017, the Bank of Jamaica cut 100 basis points in total from its policy or signal rates. Robinson said those adjustments coincided with reductions of 294 basis points in the overall weighted average lending rate for commercial banks, and 78 basis points in mortgage rates offered by building societies, Robinson said.

"The same coincidence is reflected in lending rates on new loans. The data from Bank of Jamaica's survey of credit conditions indicate that these rates on loans to businesses and for personal reasons fell by 116 basis points over the same period," he said.

In July 2017, the central bank transitioned its policy rate from its 30-day certificates of deposit to the overnight rate charged to banks. Subsequently, over the period August-November 2017, the BOJ reduced its new signal rate by 50 basis points, which it said coincided with reductions of 21 basis points in commercial bank lending rates and seven basis points on mortgages. Rates on new loans also fell by about 35 basis points over the same period.

For November 2017, the overall weighted average lending rate by commercial banks was 14.63 per cent, down from 14.71 per cent in the June 2017 period. BOJ's policy rate in June was then 4.75 per cent, Robinson said.