Monetary Policy and Retail Interest Rates in New Zealand: Comparison of Small and Large Banks
Abstract
Monetary policy rate has remained a major potent monetary policy tool used by monetary authorities in setting targets and direction of other rates and in driving the movement of other macroeconomic aggregates in both developed and developing countries. The paper determined the effect of monetary policy changes on retail interest rates in New Zealand. The study disaggregated data based on various categories of banks as large and small. The study used panel data for the period 2003 to June 2016. Several theories have been advanced to describe the transmission of monetary policy rates to commercial bank retail interest rates. Key among these theories include the Keynesian, New Keynesian, and Monti-Klein Model. It is upon these theories that this study was based. The study employed non-experimental research design using panel data for the period 2003 to June 2016. This study made use of secondary monthly data for the period 2003 to June 2016. The data consisted of treasury bill, interbank, lending and deposit rates. The treasury bill, lending rate, deposit rate of large and the interbank rates were collected from the Reserve Bank of New Zealand website. Lending rate for small banks was regressed against, interbank rate and Day Tbill. The value of R square was 0.346, indicating that 34.6 percent of the lending rate is caused by changes in interbank rate and Day Tbill for small banks. In a similar regression to determine the effect of monetary policy rate on lending rate of large banks in New Zealand, it was found that the value of R square was 0.471, indicating that 47.1 percent of the lending rate is caused by changes in interbank rate and Day Tbill for large banks. The effects of monetary policy rate on lending rate for large banks was high than the effect of monetary policy rate on lending rate for small banks in New Zealand. The short run model indicated that the goodness of fit for the short run model is satisfactory. The error correction parameter was -0.147 for small banks and shows how much of the gap created by a change in market interest rate is closed in one month and is expected to be negative for equilibrium to be restored. The error correction parameter value was lower an indication of lower response of retail interest rate to monetary policy change than that of large banks. Small banks thus have a slower response of market rate to policy rate as compared to large banks. Further, the error correction parameter was -0.367 for large banks and shows how much of the gap created by a change in market interest rate is closed in one month and is expected to be negative for equilibrium to be restored. The error correction parameter value was high an indication of faster response of retail interest rate to monetary policy change as compared to small banks. Larger banks thus have a faster response of market rate to policy rate as compared to small banks. Small banks had a high mean lag an indication that small banks experiences slow responsiveness of retail interest rates to monetary policy rate change as compared to large banks. The study therefore recommends policy recommendation to guide deposit and lending rates in New Zealand. The study also recommends expansion of banks asset base.
Key words: Monetary policy, retail interest rates, New Zealand small, large banks
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