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

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.