IDEAS home Printed from https://ideas.repec.org/p/rba/rbardp/rdp9504.html
   My bibliography  Save this paper

The Link between the Cash Rate and Market Interest Rates

Author

Listed:
  • Philip Lowe

    (Reserve Bank of Australia)

Abstract

This paper explores the relationship between the cash rate and interest rates set by financial intermediaries and interest rates set in auction markets. It presents estimates of the average degree of pass-through of cash rate changes to these other interest rates. It also presents a model of the spread between banks’ lending rates and the cash rate, and then uses the model to analyse developments in bank lending spreads over recent years. The paper argues that while banks’ average lending spreads did not widen in the early 1990s, the margin between lending rates and the cash rate did increase. It examines the reasons for this change, paying particular attention to the roles played by changes in the structure of banks’ liabilities, changes in default probabilities and changes in the degree of competition. The large lending spreads at the margin have led to intensification of competition, particularly in the market for housing loans. While these competitive pressures took some time to emerge, they are now playing a role in the narrowing of margins.

Suggested Citation

  • Philip Lowe, 1995. "The Link between the Cash Rate and Market Interest Rates," RBA Research Discussion Papers rdp9504, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9504
    as

    Download full text from publisher

    File URL: https://www.rba.gov.au/publications/rdp/1995/pdf/rdp9504.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Philip Lowe & Thomas Rohling, 1992. "Loan Rate Stickiness: Theory and Evidence," RBA Research Discussion Papers rdp9206, Reserve Bank of Australia.
    2. Bob Rankin, 1992. "The Cash Market in Australia," RBA Research Discussion Papers rdp9214, Reserve Bank of Australia.
    3. Bordes, Christian & Goyeau, Daniel & Melitz, Jacques & Sauviat, Alain, 1991. "The profitability of anticipated inflation in banking," Economics Letters, Elsevier, vol. 37(1), pages 57-60, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jenny Diggle & Robert Brooks, 2007. "The target cash rate and its impact on investment asset returns in Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 17(8), pages 615-633.
    2. Giesecke, James & Dixon, Peter & Rimmer, Maureen, 2016. "The costs and benefits of financial regulation: A financial CGE assessment of the impact of a rise in commercial bank capital adequacy ratios," Conference papers 332731, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Anthony Brassil & Jon Cheshire & Joseph Muscatello, 2018. "The Transmission of Monetary Policy through Banks' Balance Sheets," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    4. Abbas Valadkhani & Sajid Anwar & Amir Arjonandi, 2012. "How to capture the full extent of price stickiness in credit card interest rates?," Economics Working Papers wp12-02, School of Economics, University of Wollongong, NSW, Australia.
    5. Disyatat, Piti & Vongsinsirikul, Pinnarat, 2003. "Monetary policy and the transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, vol. 14(3), pages 389-418, June.
    6. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.
    7. David Gruen & John Romalis & Naveen Chandra, 1999. "The Lags of Monetary Policy," The Economic Record, The Economic Society of Australia, vol. 75(3), pages 280-294, September.
    8. Valadkhani, Abbas, 2013. "The pricing behaviour of Australian banks and building societies in the residential mortgage market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 133-151.
    9. Abbas Valadkhani & Sajid Anwar, 2012. "Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 341-350, September.
    10. Gordon de Brouwer, 1995. "The Liberalisation and Integration of Domestic Financial Markets in Western Pacific Economies," RBA Research Discussion Papers rdp9506, Reserve Bank of Australia.
    11. Machava, Agostinho, 2017. "The Macroeconomic Determinants of the Pass-Through from the Market Interest Rate to the Bank Lending Rate in Mozambique," Umeå Economic Studies 954, Umeå University, Department of Economics.
    12. Valadkhani, Abbas & Worthington, Andrew, 2014. "Asymmetric behavior of Australia's Big-4 banks in the mortgage market," Economic Modelling, Elsevier, vol. 43(C), pages 57-66.
    13. Milind Sathye, 2013. "Financial Crisis and Interest Rate Pass-Through in Australia," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-22.
    14. Ric Battellino & John Broadbent & Philip Lowe, 1997. "The Implementation of Monetary Policy in Australia," RBA Research Discussion Papers rdp9703, Reserve Bank of Australia.
    15. Pablo Cotler & Rodrigo Carrillo, 2022. "Monetary Policy and Lending Interest Rates: evidence from Mexico," Working Paper Series Sobre México 2022003, Sobre México. Temas en economía.
    16. Jason Nassios & James A. Giesecke & Peter B. Dixon & Maureen T. Rimmer, 2016. "A modelling framework for analysing the role of superannuation in Australia's financial system," Centre of Policy Studies/IMPACT Centre Working Papers g-266, Victoria University, Centre of Policy Studies/IMPACT Centre.
    17. de Brouwer,Gordon, 1999. "Financial Integration in East Asia," Cambridge Books, Cambridge University Press, number 9780521651486.
    18. West, L.k. & Agbola, W.F., 2005. "Causality Links Between Asset Prices And Cash Rate In Australia," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(3), pages 69-86.
    19. James A. Giesecke & Peter B. Dixon & Maureen T. Rimmer, 2016. "The Economy-wide Impact of a Rise in Commercial Bank Capital Adequacy Ratios," Centre of Policy Studies/IMPACT Centre Working Papers g-261, Victoria University, Centre of Policy Studies/IMPACT Centre.
    20. David M. Williams, 2010. "Consumption, wealth and credit liberalisation in Australia," Economics Series Working Papers 492, University of Oxford, Department of Economics.
    21. Nargis Bharucha & Ellis W. Tallman, 2000. "Credit crunch or what? Australian banks during the 1986–93 credit cycle," Economic Review, Federal Reserve Bank of Atlanta, vol. 85(Q3), pages 13-34.
    22. Abbas Valadkhani & George Chen & Bernice Kotey, 2014. "Asymmetric changes in Australia’s small business loan rate," Small Business Economics, Springer, vol. 43(4), pages 945-957, December.
    23. James A. Giesecke & Peter B. Dixon & Maureen T. Rimmer, 2017. "The Economy-wide Impacts of a Rise in the Capital Adequacy Ratios of Australian Banks," The Economic Record, The Economic Society of Australia, vol. 93, pages 16-37, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jenny Diggle & Robert Brooks, 2007. "The target cash rate and its impact on investment asset returns in Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 17(8), pages 615-633.
    2. Valadkhani, Abbas & Worthington, Andrew, 2014. "Asymmetric behavior of Australia's Big-4 banks in the mortgage market," Economic Modelling, Elsevier, vol. 43(C), pages 57-66.
    3. Milind Sathye, 2013. "Financial Crisis and Interest Rate Pass-Through in Australia," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-22.
    4. Adrian Blundell-Wignall & Marianne Gizycki, 1992. "Credit Supply and Demand and the Australian Economy," RBA Research Discussion Papers rdp9208, Reserve Bank of Australia.
    5. Massimo Giulidori & Enzo Dia, 2009. "The Determinants of Bank Interest Margins: Estimates of a Dynamic Model," Working Papers 157, University of Milano-Bicocca, Department of Economics, revised Mar 2009.
    6. Dilem Yildirim, 2012. "Interest Rate Pass-Through to Turkish Lending Rates: A Threshold Cointegration Analysis," ERC Working Papers 1207, ERC - Economic Research Center, Middle East Technical University, revised Sep 2012.
    7. Marianne Gizycki & Mark Levonian, 1993. "A Decade of Australian Banking Risk: Evidence from Share Prices," RBA Research Discussion Papers rdp9302, Reserve Bank of Australia.
    8. Jane BOGOEV, 2010. "Investigation Of The Determinants Of The Adjustment Of Lending Rates In Macedonia – A Sur Approach," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 6, pages 89-116, December.
    9. Adrian Blundell‐Wignall & Marianne Gizycki, 1994. "Credit Supply and Demand and Business Investment," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 27(1), pages 101-113, January.
    10. Vajanne, Laura, 2009. "Inferring market power from retail deposit interest rates in the euro area," Research Discussion Papers 27/2009, Bank of Finland.
    11. Chmielewski, Tomasz, 2003. "Interest rate pass-through in the Polish banking sector and bank-specific financial disturbances," MPRA Paper 5133, University Library of Munich, Germany, revised 31 Jan 2004.
    12. Wang, Kuan-Min & Lee, Yuan-Ming, 2009. "Market volatility and retail interest rate pass-through," Economic Modelling, Elsevier, vol. 26(6), pages 1270-1282, November.
    13. Hinterschweiger, Marc & Khairnar, Kunal & Ozden, Tolga & Stratton, Tom, 2021. "Macroprudential policy interactions in a sectoral DSGE model with staggered interest rates," Bank of England working papers 904, Bank of England.
    14. James D. Shilling & Piyush Tiwari, 2021. "On Bank Pricing of Single-family Residential Home Loans: Are Australian Households Paying Too Much?​," GRU Working Paper Series GRU_2021_023, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    15. Andries, Natalia & Billon, Steve, 2016. "Retail bank interest rate pass-through in the euro area: An empirical survey," Economic Systems, Elsevier, vol. 40(1), pages 170-194.
    16. Abbas Valadkhani & Sajid Anwar, 2012. "Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate," The Economic Record, The Economic Society of Australia, vol. 88(282), pages 341-350, September.
    17. Disyatat, Piti & Vongsinsirikul, Pinnarat, 2003. "Monetary policy and the transmission mechanism in Thailand," Journal of Asian Economics, Elsevier, vol. 14(3), pages 389-418, June.
    18. Gabor Hajnal & Csaba Lados, 2022. "Analysis of the Repricing Practice of Newly Disbursed Housing Loans," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 21(3), pages 5-43.
    19. Vajanne, Laura, 2009. "Inferring market power from retail deposit interest rates in the euro area," Bank of Finland Research Discussion Papers 27/2009, Bank of Finland.
    20. Sastry, D. V. S. & Singh, Balwant & Bhattacharya, Kaushik, 2009. "Stability of Lending Rate Stickiness: A Case Study of India," MPRA Paper 26570, University Library of Munich, Germany.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp9504. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Paula Drew (email available below). General contact details of provider: https://edirc.repec.org/data/rbagvau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.