A Bank-Level Analysis of Interest Rate Pass-Through in South Africa

9 May 2022
Publication Type: Research Paper

We study how changes in the South African Reserve Bank’s policy rate are passed through to a range of household and corporate lending and deposit interest rates over the period January 2009 to December 2020. We use a suite of asymmetric error correction models that allow for sign asymmetry while controlling for a range of confounding factors, including bank funding spreads, liquidity and credit premia. Our results indicate that interest rate hikes are passed through to mortgage interest rates more strongly than rate cuts in long-run equilibrium but that pass-through to other lending rates is generally complete and symmetric. While pass-through to call deposit interest rates is found to be complete and symmetric, cheque account interest rates are very sticky. A notable implication of our results is that the stimulatory effect of a policy rate cut is blunted, both in terms of the degree to which it reduces debt servicing costs and the degree to which it disincentivises saving. A counterfactual analysis reveals that household mortgage interest rates have fallen by approximately 300 basis points during the COVID-19 pandemic relative to a business-as-usual scenario. This indicates that the South African Reserve Bank’s accommodatory policy has remained effective over the COVID-19 period, despite offsetting increases in risk and liquidity premia that have weakened the transmission of policy easing to the real economy.



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