Foreign Currency Lending and the Interest Rate Pass-Through in Selected CEE Countries

In this paper we analyze the interest rate pass-through in four central and eastern European countries, i.e. the Czech Republic, Hungary, Poland and Romania (CEE4), all of which have an inflation targeting framework in place. We first study the interest rate pass-through using a multiple equation framework We then focus on retail lending to analyze the role of foreign-currency lending for the interest rate channel: to our knowledge, the link between monetary transmission and foreign currency lending has so far not been explicitly studied in the empirical literature on the CEE4 countries. We also address the question of how the interest rate channel was affected by the financial crisis in 2008/2009. The results show significant cross-country differences, partly explained by foreign-currency lending, and support the view that the impact of the crisis on interest rate pass-through is likely to be of a permanent nature. Among the CEE-4, only Poland shows full pass-through at all stages. As far as retail lending is concerned, pass-through is higher and the mark-up lower for larger loans. Romania shows the highest markups and lowest pass-through, while only in the Czech Republic the effect of the financial crisis on the pass-through was limited.