MONETARY POLICY REPORT | SUMMER 2023 (box 3)
(authors: Jakub Grossmann, Branislav Saxa)
The first phase of monetary policy transmission via the interest rate channel is the pass-through of changes in monetary policy rates to client rates on loans and deposits. This box is a follow-up to an October 2022 blog article[1] and shows how loan and deposit rates changed for Czech firms and households between the end of June 2021 and the end of June 2023. In mid-2021, the CNB started to raise its 2W repo rate from 0.25%. In the space of about one year, the rate increased to 7%, where it has stayed ever since.[2]
The pass-through of monetary policy rates and market rates to client rates on koruna loans to non-financial corporations is very fast. Lending rates for firms are mostly linked to PRIBOR market rates, so changes in CNB monetary policy rates pass through almost immediately to client rates. Therefore, the prevailing client rate on corporate loans was already between 8% and 9% in June 2022 and has gone up only marginally since summer 2022 (see Chart 1).[3] At the end of June 2023, domestic banks were granting the largest volumes of koruna loans to companies at interest rates of 9%–10%. By contrast, the distribution of client rates on euro-denominated corporate loans only started to shift to significantly higher rates in autumn 2022, owing to the rise in ECB interest rates (see Chart 2). The euro financing of Czech companies by domestic banks is becoming more costly as ECB interest rates continue to rise, and the prevailing client interest rate on euro-denominated loans was in the range of 5%–6% at the end of June 2023. The narrowing interest rate differential is making euro financing less attractive to domestic firms. This is being reflected in subdued growth in the share of euro-denominated loans in their total credit debt, which reached 48% in June 2023.
Chart 1 – Interest rates on koruna-denominated loans to non-financial corporations respond almost immediately to monetary policy rates
x-axis: interest rate band in %; y-axis: volumes in CZK billions; stocks of koruna-denominated loans
Chart 2 – The pass-through to interest rates on euro-denominated loans is also fast, but the ECB raised its monetary policy rates later
x-axis: interest rate band in %; y-axis: volumes in CZK billions; stocks of euro-denominated loans
Loans for house purchase are the most important loan product for households, accounting for almost 80% of their credit commitments. The vast majority of loans for house purchase are mortgages, and a large proportion of the mortgages held by Czech households have their rates fixed for five years or more. So far, therefore, only quite a small number of households have faced higher mortgage rates when refinancing and refixing their loans. This is reflected in very small shifts in the distribution of client interest rates on the total stock of loans to households for house purchase (see Chart 3). The largest proportion of Czech mortgages still have interest rates in the 2%–3% band. The effects on the budgets of mortgaged households thus remain limited and the bulk of the transmission is taking place via a sharp drop in demand for new loans.[4] As illustrated in Chart 4, the volume of new loans for house purchase has dropped sharply relative to mid-2021, while the rates on such loans have risen significantly. In June 2023, the largest volume of new loans for house purchase were provided at interest rates of 5%–6%.
Chart 3 – Only a small proportion of housing loans have so far been refinanced at higher interest rates
x-axis: interest rate band in %; y-axis: volumes in CZK billions; stocks of loans
Chart 4 – Interest rates on new loans for house purchase are distinctly higher than in the past; volumes have fallen sharply
x-axis: interest rate band in %; y-axis: volumes in CZK billions; new loans
The distributions of client rates on corporate and household deposits have two peaks. In the case of firms, the first peak – with the largest deposit volume – occurs at client rates of zero. As Chart 5 shows, firms are reducing the volume of zero-interest deposits. It has gone down by around CZK 200 billion in two years. The second peak in the distribution of client deposit rates for companies occurs at 6%–7%. The volume of high-interest corporate deposits continues to rise, with almost half of corporate deposits remunerated at rates of higher than 5% in June 2023.
Chart 5 – Firms are capable of attaining deposit rates close to the repo rate
x-axis: interest rate band in %; y-axis: volumes in CZK billions; stocks of deposits
The first peak in the client interest rate distribution is even bigger for households than for firms. The volume of zero-interest household deposits is falling but is still above CZK 1 billion. However, households seeking higher returns and actively transferring their deposits to products with higher interest rates are capable of obtaining relatively high rates. The second peak in the distribution of client deposit rates for households thus occurs in the 5%–6% range, where approximately CZK 550 billion was deposited at the end of June (see Chart 6). In June 2023, about one quarter of household deposits were remunerated at rates of higher than 5%.
Chart 6 – By actively seeking out higher interest rates, a large proportion of household deposits have been able to move to bands with a rate of over 5%
x-axis: interest rate band in %; y-axis: volumes in CZK billions; stocks of deposits
[1] See the blog article: Klientské úrokové sazby z úvěrů a vkladů v kontextu zvyšování měnověpolitických sazeb (Client loan and deposit rates in the context of increasing monetary policy rates; available in Czech only).
[2] The 2W repo rate was 0.5% as of 30 June 2021 and 7% as of the other dates used in the charts (30 June 2022, 31 December 2022 and 30 June 2023). The Bank Board last raised its 2W repo rate at its meeting on 23 June 2022.
[3] To keep the individual data confidential, values lower than CZK 10 billion are replaced by 0 in Chart 1, values lower than CZK 7 billion are replaced by 0 in Chart 2, values lower than CZK 0.5 billion are replaced by 0 in Charts 4 and 5, and values lower than CZK 30 billion are replaced by 0 in Chart 6.
[4] The increasing length of time since the 2W repo rate was raised substantially is also gaining in importance. It will affect the size of the instalments on current mortgage loans which are being refinanced (or will be refinanced in the near future). This is discussed in Box Refixation and refinancing of mortgages and their effects on household expenditure in the Summer 2023 MPR.