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WOW.
BOJ cuts their signature, key policy rate from an already *historically* low of 1.25% by 50 basis points to 0.75%.
I can’t recall a time, ever in our history, when this rate was so low.
If I am mistaken, please correct me.
THIS IS HUGE.
//Thread For Explanation
BOJ cuts their signature, key policy rate from an already *historically* low of 1.25% by 50 basis points to 0.75%.
I can’t recall a time, ever in our history, when this rate was so low.
If I am mistaken, please correct me.
THIS IS HUGE.
//Thread For Explanation
Why should we care about what the Bank of Jamaica does with their key policy rate?
The way the financial system works is that all banks (and deposit taking institutions) put their cash and deposits with BOJ. BOJ is literally the bank for all other banks.
The way the financial system works is that all banks (and deposit taking institutions) put their cash and deposits with BOJ. BOJ is literally the bank for all other banks.
BOJ pays an interest rate to all of the banks for their deposits. This is considered their “key policy rate”.
This rate has a direct implication on the profitability of banks and their incentives.
This rate has a direct implication on the profitability of banks and their incentives.
Say ‘Bank Gayle’ has $1M in deposits, and BOJ’s “key policy rate” is 10%, then by simply putting the entire $1M with BOJ for the year Bank Gayle will earn $100,000 JMD.
Doing nothing.
Doing nothing.
If Bank Gayle has committed to pay 2% on those deposits to customers, then during that year they have to pay out a total of $20,000 JMD for the year.
If they get $100K from BOJ, but pay $20K to customers, they keep $80K in gross profit.
If they get $100K from BOJ, but pay $20K to customers, they keep $80K in gross profit.
All they have done is acted like a middle man and collected $80K to pay their bills.
The bigger that spread between what BOJ pays them and what they pay depositors is the more money they make.
The bigger that spread between what BOJ pays them and what they pay depositors is the more money they make.
So BOJ can tweak the behavior of banks by setting this rate.
When banks are lending too aggressively, BOJ can increase the rate so banks will lend less to the economy and put more funds with them.
When banks lend too little, BOJ decreases the rate so banks lend more.
When banks are lending too aggressively, BOJ can increase the rate so banks will lend less to the economy and put more funds with them.
When banks lend too little, BOJ decreases the rate so banks lend more.
So with the economic recovery picking up steam, one of the goals of the administration and BOJ is to incentivize banks to lend more so businesses can expand and create more jobs which will create a virtuous cycle of growth in the economy.
So this rate cut is just another signal to banks that they need to earn revenue from their core operations of lending and fees and not from the BOJ.
Aka, “do your job”.
This is a great sign for the economy and isn’t very surprising for those following.
Aka, “do your job”.
This is a great sign for the economy and isn’t very surprising for those following.
Also, this rate cut is in conjunction with their other policy measure of reducing the reserve ratio for banks.
The reserve ratio is the % of the total deposits that they have to keep at BOJ.
The reserve ratio is the % of the total deposits that they have to keep at BOJ.
So when they drop the reserve ratio, it further incentivizes the banks to lend more cash to the economy.
