28. The Time-Varying Pass-Through of the Lending Rate Responses to the Repo Rate Changes and Loan Intermediation Mark-Ups

Studies such as Mojon (2000), Heinemann and Schüler (2002), Sander and Kleimeier (2004), Cottarelli and Kourelis (1994) and Borio and Fritz (1995) have examined differences in the pass-through across countries. Their findings suggest that the differences in the pass-through across countries are generally associated with differences related to structural factors such as the level of concentration or financial market characteristics. While studies that have focused on micro-level analysis within countries, such as De Graeve et al. (2004) relate the pass-through to factors such as an institution’s size, refinancing conditions and the extent of business conducted with non-bank institutions within the economy.

With regard to pass-through studies conducted in South Africa, Sander and Kleimeier (2006) find a small degree of stickiness in lending rates in response to changes in money-market rates on impact; owever, they observe that anticipated changes were adjusted almost immediately. Aziakpono and Wilson (2010) found that South African commercial banks are more rigid in adjusting their lending rates upwards in response to positive shocks in the official rate. This finding supports the negative customer reaction hypothesis.

The results showed that, on average, mortgages rates responded more quickly to changes in the costs of funds than business lending rates. The speed at which the lending rates go back to their equilibrium relationship with funding costs differed across the lending markets. Chong et al. (2006) found that the adjustment speeds of administered rates in response to changes in the benchmark market rate in Singapore varied across financial products and were asymmetric. Based on their findings, they concluded that upward rigidity in lending rates in Singapore was consistent with the credit rationing hypothesis as opposed to menu costs, imperfect competition or the switching costs hypothesis. In New Zealand, Liu et al. (2011) found asymmetries in the initial short-run response of bank lending rates to changes in funding rates. They found asymmetries in the initial short-run response of bank rates and mortgage rates adjusted downwards more rapidly than upwards.

The credit conditions index is sourced from Gumata and Ndou (2018). Bank credit extension and real economic activity in South Africa.