Differences in client interest rates in the Czech Republic and the euroarea
In the Czech Republic, the monetary policy rate cuts made during 2009 were most visible in falling rates on loans to non-financial corporations, while rates on housing loans were flat and rates on consumer credit rose modestly (see Charts 1 and 2).
Financial market reference rates diverged;1 money market rates declined while the ten-year government bond yield temporarily rose. In the euro area, by contrast, interest rates have been falling for all types of loans since the end of 2008 in line with the fall in the ECB’s key interest rate, money market rates (partly due to unconventional monetary policy) and the ten-year government bond yield (see Charts 3 and 4).
This Box looks at the divergent trends in certain client interest rates in the Czech Republic and the euro area and the factors underlying this divergence. The analysis is based on decomposition of the average client interest rate on new loans in the Czech Republic and in the euro area into the contributions of the difference in monetary policy rates, the difference in the range of market and monetary policy interest rates and the difference in the range of client rates and relevant financial market rates expressing the risk premium of the particular segment of the credit market in the particular phase of the business cycle.
The difference in the average client rate on new loans in the Czech Republic and the euro area has increased since the end of 2008. This reflects a slightly smaller decline in the domestic monetary policy rate and money market interest rates (the 3M PRIBOR versus the 3M EURIBOR) in the Czech Republic than in the euro area. The difference in the credit market risk premia is relatively stable on average in the Czech Republic at around 1 percentage point and is at the pre-crisis level. An increase in the difference in client interest rates between the Czech Republic and the euro area was recorded in all segments of the credit market. As regards new loans to non-financial corporations, the increase in the difference in rates was influenced by the aforementioned smaller decline in the monetary policy and short-term market interest rate in the Czech Republic than in the euro area, while the difference in the risk premium for these loans narrowed.
The increase in the difference in interest rates on new loans to households was due to a rise in the ten-year yield on the Czech government bond as against a broadly flat yield in the euro area amid a smaller decline in the monetary policy rate in the Czech Republic than in the euro area. The difference in the risk premium for housing loans also increased. A larger increase in the risk premium for domestic loans was recorded for short-term rates on housing loans, i.e. rates with fixations of up to one year. The risk premium for consumer credit is traditionally high in the Czech Republic compared to the euro area and this difference remained broadly unchanged in the period under review.
As regards interest rates on deposits, the most pronounced transmission to rates in the Czech Republic was recorded for corporate deposits. However, interest rates on household deposits also decreased in 2009. As in the case of loan rates, rates on deposits declined more strongly in the euro area than in the Czech Republic. Here too, though, this primarily reflected a larger decline in monetary policy and market rates. Deposit rates, however, are now more significantly below market rates in the Czech Republic than in the euro area.
All this shows that monetary transmission in the Czech economy experienced some disturbances during the global financial and economic crisis. Overall, however, the monetary policy transmission mechanism remains functional. The risk premia for rates on loans increased, although no more so than in the euro area, with the exception of shorter fixation periods for housing loans. The smaller decline in client interest rates thus reflects a less significant reduction of monetary policy rates, divergence in rates on the interbank market (mainly because of the ECB’s use of unconventional instruments) and an increase in tenyear government bond yields in the Czech Republic.
1 For the transmission mechanism to work effectively, it is vital that changes in key CNB interest rates, transmitted by the financial market, influence client rates. According to the CNB’s analyses (Box 1 Transmission of financial market interest rates to client interest rates, Inflation Report II/2009), in the Czech Republic the 1M PRIBOR and FRA 3*6 rates are most important for short fixations of rates on loans to corporations, while the 3M and 1Y PRIBOR are most important for long fixations of rates on corporate loans. The 1M PRIBOR and the ten-year government bond yield are most important for rates on housing loans.