Base Rate Pass-Through: Evidence from Banks' and Building Societies' Retail Rates

Abstract

Official interest rate changes are intended to influence short rates on money market instruments and retail products, such as deposit accounts and mortgages, and complete pass-through is often simply taken for granted. This paper provides a theoretical and econometric framework for assessing the evidence for this assumption using 14 years of monthly data for interest rates on deposit and mortgage products offered by UK banks and building societies. The method employed allows for asymmetries and non-linearities in adjustment and the results show that the speed of adjustment in retail rates depends on whether the perceived 'gap' between retail and base rates is widening or narrowing.