Interest Rate Pass-through and Monetary Policy Regimes in South Africa

The goal of monetary policy in South Africa is to keep the rate of inflation within the target band of 3% to 6%. It is generally recognized that the success of monetary policy in achieving this will, to a large extent, depend on the stickiness of market interest rates (commercial bank lending and deposit rates, other money market rates and capital market rates). The stickiness of market rates is often regarded as an obstacle to the smooth transmission of monetary policy impulses. Yet, a systematic measure of the degree of response of market interest rates to changes in monetary policy stance has not received adequate attention in South Africa. Against this backdrop, this paper uses symmetric and asymmetric error correction modelling techniques and monthly interest rate data for the period 1980 to 2007 to explore the stickiness of interest rates in South Africa. The study finds that the speed of adjustment of market interest rates varies across the rates. The highest speed is in the lending rate, followed by the Treasury bill rate and money market rate, closely followed by the commercial bank deposit rate, while the government bond yield has the lowest adjustment speed. Evidence shows that commercial banks are becoming increasingly more competitive in the credit market, while the opposite is true for the deposit market, where the evidence seems to support banks' collusive behaviour. To minimize this, regulations may target more transparent banking operations to ensure that banks do not exploit depositors. Lastly, there are some indications that the formal accountability and transparency measures entrenched in the inflation targeting regime from 2000 have helped improve the speed of monetary transmission.