BOJ anticipates the increase to be small increase

Durrant Pate/Contributor

Interest rates within the local banking sector are set to go up even further, as a result of the impending one per cent increase in the domestic and the foreign currency Cash Reserve Requirements (CRRs) applicable to deposit-taking institutions (DTIs).

The Bank of Jamaica (BOJ) announced yesterday (February 21) that the domestic currency CRR will be increased by one per cent to 6.0 per cent while the foreign currency CRR will move up one per cent to 14.0 per cent, effective April 1, 2023. Arising from the increase, the BOJ is anticipating that bank rates will move upwards.

Speaking at the bank’s quarterly news briefing yesterday, BOJ Governor Richard Byles said the margin of movement is dependent on individual banks noting some banks might be able to absorb the one per cent increase in the CRR, while others would want to pass on this in higher rates.

Byles made the point that the BOJ has been bringing down the CRR prior to the pandemic moving from 12.0 per cent at the start of 2019 to 5.0 per cent given the then extended period of low and stable inflation.

In addition, the BOJ maintained a constant differential between the domestic currency CRR and the foreign currency CRR over much of the period.

Wave of increased liquidity coming

The BOJ Governor highlighted the current clear and present danger of a wave of increased liquidity, which will force up interest rates even further. This, the BOJ boss indicated, has necessitated an increase in the CRR to counter and mop of some of this excess liquidity.

According to Byles: “We are concerned that what we face is a wave of liquidity, which arises from government activity as well as our activity… so this is a preemptive move at what we see as a potential threat. Too much liquidity in the system will put pressure on the US$ market… .”

Regarding mopping up of excess liquidity, the BOJ Governor made reference to the Federal Reserve in the United States, which he articulated has taken a similar approach as the BOJ.

Robert Stennett, Deputy BOJ Governor for the Research & Economic Programming Division and Financial Stability, disclosed that the level of liquidity in the banking system is set towards the end of February to March. He stated that the current liquidity level in the banking sector is in the region of J$14 billion to J$16 billion with immediate action needed to halt increase, thus resulting in the one per cent increase in the CRR.

“As the Governor has indicated that this liquidity is likely to rise incrementally towards of February, March and April… . The one percentage point increase in the CRR is projected to absorb on the Jamaican dollar side about J$10 billion. In terms of future adjustments in the CRR… . So when the increase takes effect and they (BOJ’s Monetary Policy Committee) we assess the impact to ensure we achieve the desired result.

BOJ’s economic outlook

Turning to the outlook on the Jamaican economy, Byles states that the economy continues to show strong growth with real Gross Domestic Product (GDP) growing by 5.9 per cent for the September quarter, which was higher than the bank’s projection with signs that the December quarter continued to expand.

The projection for the March quarter is for a continuation of this expansion with domestic economic activity returning to pre-pandemic levels.

Byles told the briefing that, “GDP growth for fiscal year 2023/2024 is projected to moderate somewhat, as income growth among Jamaica’s main trading partner normalises to pre-COVID rates”.