How Do Anticipated Changes to Short‐Term Market Rates Influence Banks' Retail Interest Rates? Evidence from the Four Major Euro Area Economies

Abstract

In this paper, we argue that banks anticipate short‐term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates—a level, slope, curvature model, and a principal components model—before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.

The interest rate pass-through in the euro area during the sovereign debt crisis

“…The EMS contains information not only about actual monetary policy, but also about future monetary policy as expected by market participants. It has been pointed out for the euro area by Banerjee et al (2013), Hofman and Mizen (2004), Kleimeier and Sander (2006) and Kwapil and Scharler (2010) that against the background of adjustment costs for bank retail products, expectations about future monetary policy rates matter for the speed and completeness of the IP. Moreover, at the ZLB, when conventional instruments are no longer available, influencing interest rate expectations by announcing unconventional measures remains one of the possible means to stimulating the economy ("signaling channel" (Bauer and Rudebusch (2011)).…”

“…Aristei and Gallo (2014), Banerjee, Bystrov, and Mizen (2013), Belke, Beckmann, and Verheyen (2013), de Bondt (2005), von Borstel (2008, Darracq Paries, Moccera, Krylova, and Marchini (2014), ECB (2009), ECB (2013, Hofman (2006), Hristov, Hülsewig, and Wollmershäuser (2014), Sander and Kleimeier (2004), Sørensen and Werner (2006).…”

Interest Rate Pass-Through: A Meta-Analysis of the Literature

“…That is, we choose the median year of the study's sample and match it with the corresponding assessment of central bank independence from the Garriga (2016) data set. 4 Similarly, the median year of the sample determines the setting of the dummies for inflation targeting and floating exchange rate regime. Table A4 in the Appendix presents the…”

The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises

“…Hannan andBerger (1991) andvan Leuvensteijn et al (2013) conclude that the rigidity of bank rates depends on the competition among banks. Banerjee et al (2013) explicitly introduce the banks' expectations hypothesis in their lending rates dynamics. Many studies conclude that the pass-through depends on the characteristics of banks, leading to the analysis of the bank lending channel (Kashyap and Stein (2000), Kishan and Opiela (2000), Altunbas et al (2002), Barbier de la Serre et al (2008), Gambacorta (2008)).…”