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UPDATE: BOJ clamps down on bank cash, expects lending rates to rise

The Bank of Jamaica, BOJ, expects lending rates to rise as a result of the increase in its cash reserve requirements, but has indicated that any further moves to adjust the ratio will be based on market conditions.

This as the BOJ Monetary Policy Committee, MPC, decided to increase the domestic and the foreign currency cash reserve ratio, or CRR, for deposit-taking institutions by a percentage point, starting April 1, while otherwise holding the central bank’s policy interest rate steady at 7.0 per cent.

The CRR is a percentage of deposits held by banking institutions at BOJ at zero interest. The CRR relating to Jamaican dollar cash reserves will rise from five per cent to six per cent, while for foreign holdings, it will rise from 13 per cent to 14 per cent.

BOJ Governor Richard Byles says the move is expected to impact lending rates.

“It may cause lending rates to rise and I think each bank will judge that for themselves, but what we’re most interested in is taking the liquidity out of the system,” Byles said during his quarterly briefing on monetary policy on Tuesday.

The average lending rate is currently around 11.4 per cent.

The CRR is the central bank’s newest tool to rein in inflation and nudge prices back towards the 4 to 6 per cent target range.

It was unveiled amid continuing restraint by the BOJ on adjustments to its benchmark interest rate, which the MPC also decided on Monday to maintain at 7.0 per cent.

Inflation in the month of January was negative, and annual inflation dropped to 8.1 per cent as a result.

Byles said the central bank sees inflation continuing to fall to around 7.15 per cent by the end of this fiscal year, that is, at the end of March. He also expects a return to the target range by December 2023, and for inflation to generally remain at that level for the medium term.

“This outlook is consistent with global consensus forecasts for a fall in commodity and shipping prices. It also assumes that inflation expectations will continue to decline, and it takes into account the bank’s overall monetary policy stance,” Byles said.

The BOJ’s wielding of the CRR comes alongside its forecast of a possible wave of liquidity in the financial system, which may arise as a result of seasonal activity on the part of the Jamaican Government or when the BOJ intervenes in the foreign exchange market. Robert Stennett, deputy governor in charge of research and economic programming and financial stability, reported that as of Monday, the level of liquidity in the monetary system was between $14 billion and $16 billion.

“Our projection is that this liquidity is expected to rise incrementally towards the end of February into March and April, consequent on the government’s and the central bank’s liquidity operations,” Stennett said.

“It’s a pre-emptive move to stop what we see as a potential threat. Too much liquidity in the system will put great pressure on the US dollar market,” Byles added.

Stennett said the increase in the CRR is expected to remove about $10 billion on the Jamaican dollar side of the system, and mop up US$44 million to US$45 million in foreign currency.

The central bank has said the CRR might be adjusted again in coming periods, but Stennett noted that future changes will always be based on the available data.

Pre-pandemic, the CRR was at 12 per cent, but has been reduced since 2019 to the current level of five per cent amid stable inflation.

Byles said the central bank has consistently encouraged banks to raise the rates that they pay to their depositors to encourage savings.

“This is our objective in fighting inflation, because we want to take the edge off the exuberance in the economy,” Byles said, noting that the banks have only made minimal adjustments in this regard.

Since the policy rate increases in October 2021, the average deposit rate has climbed from one per cent then to 1.62 per cent now. However, the savings rate offered by the banks remains stuck at just 0.42 per cent on average.

The Bank of Jamaica’s benchmark rate, which is equivalent to the rate it pays banks on their overnight deposits at the central bank, was last raised in November. The MPC’s last two decisions, in December and again on Monday, February 20, maintained the rate at 7.0 per cent, following more than a year of adjustments from a historic low of 0.5 per cent.

The MPC’s next interest rate decision is scheduled for March 29.


CORRECTION: This story has been updated to correct Robert Stennett’s title to BOJ deputy governor.

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