Interest Rate Pass-Through and the Asymmetric Relationship between the Cash Rate and the Mortgage Rate

Abstract

There is an ongoing controversy over whether banks' mortgage rates rise more rapidly than they fall due to their asymmetric responses to changes in the cash rate. This paper examines the dynamic interplay between the cash rate and the standard variable mortgage rate using monthly data in the post-1989 era. Unlike previous Australian studies, our proposed threshold and asymmetric error-correction models account for both the amount and adjustment asymmetries. We found that the Reserve Bank of Australia's rate rises have a much larger and more instantaneous impact on the mortgage rate than rate cuts.