Monetary policy stabilisation, changes in the banking system and interest rate pass-through: the Czech Republic 1999–2006

Abstract

This article deals with the relationship between market and client interest rates in the period of inflation stabilisation and banking system transformation in the Czech Republic in 1999–2006. It analyses the character of short-run and long-run equilibrium of the transmission of market interest rates to lending and deposit interest rates. In the theoretical part crucial characteristics of the banking system in transition countries and their effects on interest rate dynamics are discussed. These are the strong position of large state-owned banks, limited power of non-banks, low elasticity of demand for bank products, and high demand for investment and consumption. The empirical analysis shows different behaviour of client interest rates in the short and long run and a significant impact of changing characteristics of the bank sector (growth of competition, reduction in credit risk and an increase in operational efficiency) on the stability of the relationship between market and client interest rates.