The Effect of Interbank Liquidity Surplus on Corporate and Interbank Interest Rates

The liquidity position of the banking sector is defined as the net financial claim of commercial banks on the central bank. Liquidity surplus occurs when this amount is positive, while liquidity deficit arises when the amount of net claims is negative. This study presents the causes that can lead to liquidity surplus and discusses the impact of the surplus on the monetary transmission mechanism. Similar to other emerging countries, a permanent surplus can be observed in Hungary; thus the paper also provides an overview of the factors behind the evolution of the surplus and the tools applied by the Hungarian National Bank (MNB) to address it. In addition, as customary in the literature, cointegration regression and error correction models are applied to Hungarian data to investigate the pass-through of corporate lending rates and interbank rates and the effect of the liquidity position on the interest rate transmission. Contrary to theoretical expectations, our results suggest that the interbank liquidity surplus tended to increase the lending rates on non-financial firms in the review period (January 2003 – August 2015 and January 2003 – August 2008). On the other hand, the impact on interbank rates is entirely consistent with international experiences and theoretical expectations in that the forint-denominated liquidity surplus pushes down interbank rates.