Abstract
The paper considers the pass-through of the interbank and retail interest rates for the case of Lithuania. The need for the interest rate transmission analysis has grown during the volatile market period caused by the global financial crisis. The objective of the article is to check theoretical and statistical aspects of domestic currency (litas) interest rate pass-through from interbank to retail interest rates and, specifically, to determine whether the recent global financial crisis has affected this process. Methods used in the article include a systemic analysis of related studies, historical data analysis and statistical testing. The analysis is expanded to cover the alternative interest rate-related variables in order to check the consistency of the pass-through of the litas interest rate over the period from October 2004 to December 2010. Results of the research show that though the lending interest rates have increased and the interest rate relationship has transformed over this period, there is no proof that changes in the bank interest rate setting policy has led to abnormal profits for banks.
Highlights
Interest rates play a crucial role in nowadays’ economy
The analysis shows that a structural break may be identified in VILIBOR and retail interest rate relationship around the beginning of the financial crisis: the pass-through became much stronger for deposit interest rates but decreased substantially for mortgage interest rates
The monetary transmission mechanism and interest rate pass-through have been extensively studied for the developed countries
Summary
Interest rates play a crucial role in nowadays’ economy. They reflect the price of borrowing and lending money and directly affect saving, spending and investment decisions in real economy. It is of paramount importance to determine whether the pass-through from monetary policy rates to long-term market and retail rates is complete, as this is the first building block of the monetary transmission mechanism. The analysis may help to describe interest rate transmission for the implementation of monetary policy and explain interest rate movements to general public Another important reason for analysing the interest rate relationship is Lithuania’s aim to introduce the euro, as upon adopting the euro, the effective implementation of a single eurozone monetary policy will partly depend on the Lithuanian interest rate pass-through mechanism.
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