Transmission of monetary policy: Bank interest rate pass-through in Ireland and the euro area

The pace of current monetary policy tightening has been unprecedented in the history of the Eurosystem. The key ECB interest rates started to increase in July 2022, the first rate rise in 11 years, and have increased sharply by 425 basis points since then. Monetary policy operates with long and variable lags, meaning these increases will take time to affect inflation. However, the first phase of transmission can already be seen in financial conditions, in particular in loan and deposit pricing by banks. In this Letter, we examine how banks’ interest rates have responded to changes in the ECB’s monetary policy rates. We address two key questions regarding this aspect of monetary policy “pass-through” in the euro area and Ireland. First, is there evidence that pass-through is different in this tightening cycle? Second, does pass-through in Ireland differ from other euro area countries? Based on our historical comparisons, we find that pass-through in the euro area is weaker now relative to previous cycles for some deposit products, stronger for new business lending and business term deposits, and the same for mortgages and outstanding business loans. For Ireland, we find evidence that, in this cycle, pass-through to new mortgage rates and to household overnight deposits, which represent the majority of Irish deposits, has been weaker than in other euro area countries.