Interest rate pass-through to deposit rates in Greece

Deposits of firms and households are the main source of bank funding and, thus, interest rates on deposits have a significant impact on banks’ overall funding costs and loan supply, as well as on bank profitability. Since July 2022, when the latest cycle of increases in key ECB interest rates started, deposit rate increases have been rather limited in Greece and the euro area, compared to the corresponding rise in the policy rates, and weaker relative to the previous tightening cycle of 2005-2008. This article examines the pass-through of ECB policy rate increases to the interest rates on household and corporate deposits in Greece in the light of the fundamental policy and structural changes that have occurred in the Greek banking system since the financial and sovereign debt crisis, as well as due to the pandemic crisis. The empirical results show the relative stickiness of deposit rates for households, compared to those for corporations, especially for term deposits. During the current tightening cycle, overnight deposit rates show a very limited rise – almost zero in the case of households; this development could have been underpinned by the composition of the deposit base of Greek banks, mainly consisting of low-balance household deposits, which are not very sensitive to interest rate changes. Broadly speaking, factors such as the increased supply of deposits to banks, relative to bank lending to the economy, and imperfect competition in the banking system appear to account for a weaker pass-through of policy rate increases to deposit rates. However, overall, we do not find strong evidence that excess liquidity in the banking system has contributed to a weaker pass-through to deposit rates in Greece, which could be related to the fact that the terms and conditions of unconventional monetary policy tools were often adjusted to support the monetary policy stance.