Effects of the financial crisis and low interest rate environment on interest rate pass-through in Czech Republic, Hungary and Romania

doi:10.1556/032.2021.00039

Abstract

Abstract In order for monetary policy’s interest rate channel to operate smoothly and effectively, the relevant retail interest rates of the real economy should react quickly and follow the movements of the prime rate. It has been observed that this connection has weakened since the financial crisis and it was suggested that the so called Weighted Average Cost of Liabilities (WACL) might be a better proxy for the banks’ marginal costs than the prime rate or interbank rate. In this study the WACL for Czech Republic, Hungary and Romania is calculated by applying cointegration tests and ARDL models. I examined whether their long-run relationships with the retail loan rates are more stable. Results: 1. Using the WACL instead of the interbank rate yields slightly more stable long-term relationships with the retail loan rates, and the WACL has been proved to be somewhat more stable than the interbank rate. 2. The interest rate pass-through has been efficient for the household loan rates in all three countries, but only in Romania for the corporate loan rates. 3. The results suggest that the central banks can effectively influence the commercial banks’ financing costs even in a low interest rate environment, although this cost represents only one component of the loan rates, and the movements of other components can offset the changes of the prime rate.

Highlights

During the last couple of decades, the main tool of monetary policy in the developed countries was interest rate steering
The results suggest that the central banks can effectively influence the commercial banks’ financing costs even in a low interest rate environment, this cost represents only one component of the loan rates, and the movements of other components can offset the changes of the prime rate
Similar trajectories were observed in other European countries (Illes et al 2015; Kapuscinski – Stanislawska 2016), suggesting that commercial banks tended to rely more on stable financing sources as a response to the global financial disturbances

Summary

Introduction

During the last couple of decades, the main tool of monetary policy in the developed countries was interest rate steering. There is growing empirical evidence that, especially after the 2008 financial crisis, this pass-through process has not been perfect in many countries.1 It has been proposed by Illes et al (2015) that the interbank rate or prime rate might not be the best proxy of the banks’ marginal cost and the observed weakened long-term relationship between the prime rates and retail rates might be a consequence. They suggested that using the so called WACL might perform better and might represent the funding costs of commercial banks more accurately. Kapuscinski – Stanislawska (2016) studied the Polish IP and arrived at a similar conclusion

Objectives

Results

Conclusion