BANK of Jamaica (BOJ) Governor Richard Byles has signalled for the first time that rate cuts could be on the horizon, and before the end of this year.

Speaking at an Inter-American Development Bank (IDB) seminar dubbed A conversation with Central Bank Presidents, Byles, who was outlining how increases in the central bank’s policy rate have impacted credit growth in Jamaica — credit growth he said has been “pretty stable” — went on to suggest that credit growth could pick up “once we start to bring [interest] rates down a notch”.

And though he was quick to add that the central bank would be “very cautious about bringing down rates”, he offered a timeline as to when rate cuts could start.

“I would say that for the next six months we would be looking cautiously at the possibility of them notching down slowly,” Byles said.

The key policy rate has been at seven per cent since November 2022, after it was jacked rapidly from 0.5 per cent a year earlier.

Byles’ signal about rate cuts comes days after the central bank said, in a rare statement on the monthly consumer price index, that it welcomed the lower-than-expected 5.6 per cent inflation out-turn for March. That rate is within the four to six per cent range the BOJ is mandated to keep inflation on an annual basis.

That aside, the BOJ Governor indicated that some of the work it has put in to bring inflation down, especially the rate hikes it has implemented, is being frustrated by commercial banks refusing to hike rates in line with expectations.

“We expected deposit and lending rates to respond to the increase in the policy rate with a one-to-three month lag — after the policy adjustments and the pass through — to range between 40 per cent and 90 per cent over the period,” Byles noted.

However, despite rates being at seven per cent for 18 months, the weighted average deposit rates have gone up by only 1.45 per cent while time deposits increased by 3.70 per cent. Weighted average private sector loans increased by just 0.40 per cent. Calculating from the 40 per cent to 90 per cent pass through would mean these rates were expected to post increases between a much higher 2.60 per cent to 5.85 per cent.

Byles said that was due to the banks tapping into their large “cheap deposit savings base.”

“So they haven’t given much, if any, increase on the savings rate and they have pretty much held the lending rates to their best customers. At the margins, maybe with new loans, they have priced them a little bit more expensive.”

And the nation’s two biggest banks have been fingered as the chief culprits frustrating the BOJ’s efforts to contain inflation by raising rates to curtail borrowing.

“Our research has shown that the source of the weakness in the credit channel is primarily due to the concentrated nature of the banking system. This is evidenced by the dominance of two major network banks, which allows them to pay low deposit rates while maintaining their profit — even when subjected to monetary policy changes,” the Governor said.

He added that banks get away with not giving their customers the best prices and services because the know your customer (KYC) requirements discourage them from changing institutions.

But he said he is encouraged that, after almost two years, inflation has dipped again to the target range after being on a generally downward trajectory since peaking at 11.8 per cent in April 2022.

This, he pointed out, was achieved by ensuring that its policy kept the currency stable, especially with about 50 per cent of the goods consumed in Jamaica being imported.

“Since October 2021, while maintaining a flexible exchange rate, the BOJ has therefore taken decisive actions in the foreign exchange market, primarily selling foreign exchange when necessary. Without these actions imported inflation, and hence the final prices faced by consumers, would have been higher.”

But realising how unresponsive banks are to the BOJ’s policy rate increases the Governor said efforts will be made to change that.

Jamaica has been exploring deposit portability and open banking as strategies aimed at improving competition in the banking sector, Byles told the audience from prepared remarks.

The World Bank has been engaged already for support, and the central bank is in the process of developing a policy framework to promote and regulate an e-KYC database for the sharing of customers’ transactional and non-transactional data. The National Identification System (NIDS) was also identified as one avenue that could make it easier for banks to onboard customers by providing identity assurance and verification.