Mortgage asymmetric pricing, cash rate and international funding cost: Australian evidence

Abstract

This study investigates asymmetry in the interest-rate pass-through at the bank level in Australia over the period 2002:7–2015:12 in a distinctive manner. First, we examine the transmission of the foreign-funds rate, in parallel with the cash rate, to bank mortgage rates. Second, we utilize the Nonlinear Auto-Regressive Distributed Lag (NARDL) framework of Shin, Yu, and Greenwood-Nimmo (2014) in panel form to capture both the time-variation and cross-section variation within bank groups. Third, we simultaneously explore heterogeneous asymmetry in the pass-through for funding cost increases and decreases on impact, in the short term and in the long term. Our results reaffirm the asymmetric relationship between the cash rate and mortgage rates. We validate that international funding costs do indeed asymmetrically drive mortgage rates. The heterogeneous asymmetry in interest-rate pass-through found in both full- and sub-sample analyses signifies that market pricing power exists in which the major banks are the most powerful in mortgage pricing, while the smaller lenders are price-takers. These findings provide important implications for policy makers, investors, and the public.