The pass-through of policy interest rates to bank retail rates in Austria

The 25th anniversary of the European monetary union provides an excellent opportunity to examine whether the pass-through of monetary policy has changed over time. The interest rate channel of monetary policy – i.e. the transmission of policy rates to money market rates and ultimately to bank retail deposit and lending rates – is crucial to the functioning of monetary policy. Only if this channel works properly can monetary policy rates influence investment and saving decisions of households and businesses, thereby steering inflation. We provide an empirical analysis of the pass-through in Austria and the euro area, examining the speed of the transmission process, alongside short-term (a)symmetries and long-term passthrough coefficients. In line with the previous literature, our findings suggest that the long-term pass-through is nearly complete for bank lending and time deposit rates in Austria. Moreover, we provide evidence of an asymmetric pass-through to (overnight and time) deposit rates in Austria, with decreases in money market rates being propagated more quickly than increases. Overnight deposit rates not only show a significantly more sluggish pass-through process than other retail rates, but also an incomplete long-term pass-through coefficient. Moreover, all Austrian retail rates adjust more quickly to changes in money market rates than their respective counterparts in the euro area aggregate. Finally, we find a long-term stable relationship between money market and retail interest rates, indicating that the pass-through process in Austria has not significantly changed over time.