Abstract
The study investigates the relationship between monetary policy and bank profitability in New Zealand using the generalized method of moments (GMM) estimator. Our sample comprises 19 banks from New Zealand over the period 2006–2018. Our results suggest that an increase in short-term rate leads to an increase in the profitability of banks, while an increase in long-term interest rates reduces bank profitability. In addition to monetary policy variables, capital adequacy ratio, non-performing loan ratio, and cost to income ratio are also important determinants of the profitability of banks in New Zealand. Capital adequacy ratio has a positive impact on bank profitability, while non-performing loan ratio and cost to income ratio have a negative impact on bank profitability.
Highlights
In order to stimulate economic growth and achieve the desired level of inflation, central banks in many countries rely on monetary policy tools
Panel A reports the results for rate and bank profitability (ROA) and Panel B reports the results for ROE
The study investigates the relationship between monetary policy and bank profitability in New Zealand using system generalized method of moments (GMM) estimator
Summary
In order to stimulate economic growth and achieve the desired level of inflation, central banks in many countries rely on monetary policy tools. Similar to other developed countries, there has been a considerable decline in the interest rates in New Zealand during the last two decades. In August 2019, Reserve Bank of New Zealand (RBNZ) further reduced interest rate from 1.5% to 1% and March 2020, the interest rate was further reduced from 1% to 0.25%. This reduction was made due to the COVID-19 (coronavirus) outbreak. It is important to note that the interest rate was 8.25% in March 2008, which is significantly higher than the current interest rate of 0.25% (Reserve Bank of New Zealand 2020a). The RBNZ had not used any unconventional monetary policy tools (Drought et al 2018); to soften the economic impact of COVID-19, recently RBNZ decided to use unconventional monetary policy by using the large scale assets purchase program (LSAP) (Croy and Sharon 2020) and currently RBNZ is planning to purchase the assets worth NZD 60 billion (Bassetti 2020)
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