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The Consumer Implications of Interest Rate Pass-Through in Retail Mortgages
Short Abstract
The residential mortgage market is Australia’s most important retail financial market for consumers. Analysing the behaviour of banks in response to changes in the cash rate is then one of the more topical issues with tangible implications for borrowers. In particular, relative mortgage rates affect decisions by consumers on switching loans from one lender to another, while the speed and accuracy with which rate cuts and increases are passed on to borrowers, especially highly indebted households, affects their financial wellbeing. In this paper, we use an autoregressive distributive lag (ARDL) dynamic heterogeneous panel methodology to analyse pass-through for Australia’s Big-4 banks from 1992 to 2012. We find the standard variable rates of the Big-4 have an error correction relationship with the official cash rate, though not all are cointegrated with the cash rate. However, the short-term pass-on is asymmetric, which indicates that the Big-4 tend to pass on interest rate increases faster than interest rate cuts. This means that consumers will more quickly and thoroughly bear the burden of a contractionary monetary policy.