Cabo Verde: Selected Issues

This Selected Issues paper focuses on interest rate pass-through in Cabo Verde. This annex estimates the interest rate pass-through in Cabo Verde. The Banco de Cabo Verde embarked on a monetary policy tightening phase since May 2023, the steepest tightening cycle in recent history. The key findings of the annex show that the policy rate pass-through is limited in Cabo Verde. Using two econometric models, the estimates point to a one-percentage point change in the policy rate leading to a medium- to long-run policy rate pass-through in the range of 0.19–0.28 for the average lending rate, and 0.13–0.23 for the long-term rate. The pass-through during tightening and easing episodes exhibits considerable heterogeneity across cycles. In particular, the pass-through is estimated to be twice as large during tightening cycles compared to easing cycles. However, the pass-through coefficient remains rather low. A larger pass-through during tightening cycles seems to be driven by the April 2001–April 2002 and January 2012-February 2014 hiking cycles. The May 2007–December 2009 and the current May 2023 cycles seem to be broadly insensitive to monetary policy, creating challenges for the effectiveness of the monetary transmission mechanism.