The BOJ Keeps Cutting Rates. Your Mortgage Rate Isn’t Following as Fast

• BOJ cut its policy rate 125 basis points in a year
• Commercial banks have been slow to pass it on
• Governor Byles publicly asked banks to be magnanimous
• The lag between the two rates isn’t automatic or fixed

The Bank of Jamaica cut its policy rate by a further 25 basis points to 5.75 percent, bringing the cumulative reduction to 125 basis points over the prior year, down from 7 percent. Announcing the cut, Governor Richard Byles used the moment to publicly press commercial banks on a separate, related problem: their own lending rates have not been coming down anywhere near as quickly.

Byles was candid about the gap. I am concerned that commercial banks have been slow in adjusting their lending rates in concert with the BOJ, he said, describing plans to meet directly with the banks to better understand the delay. We are working to have the situation fixed, but it takes a little while to get what needs to be done to make that transmission system more responsive, he said, framing the cut itself as a signal he wanted banks to actually act on. We see this as a signal, a powerful signal to them that we want rates to chug down, to come down.

The policy rate and the mortgage rate a homebuyer actually sees are related but not mechanically linked. The BOJ’s rate sets what it pays deposit-taking institutions on overnight placements, the benchmark that theoretically flows through to borrowing costs across the economy. Whether, and how quickly, that flows through to an actual mortgage offer depends on individual banks’ own funding costs, competition, operating expenses and their assessment of a given borrower’s risk, none of which the BOJ directly controls.

For a prospective buyer watching BOJ rate announcements as a signal that financing is about to get cheaper, the practical lesson from Byles’s own public frustration is a cautious one: a central bank rate cut is a necessary condition for lower mortgage rates, not a sufficient one, and the gap between the two can run for months while the transmission mechanism Byles described works, or fails to work, its way through the banking system.

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