Get access

How Do Anticipated Changes to Short-Term Market Rates Influence Banks' Retail Interest Rates? Evidence from the Four Major Euro Area Economies





  • The authors gratefully acknowledge financial support from the British Academy through SG-47026 and the EU Commission through MRTN-CT-2006-034270-COMISEF. An early version of this paper was discussed at an “expert meeting” at the European Central Bank, Frankfurt. For their comments we thank Philip Bond, Satyajit Chatterjee, Mike Dotsey, Loretta Mester, Mark Watson, Jonathan Wright, Cheng Zhu, and seminar participants at the Federal Reserve Bank, Philadelphia, the Bank for International Settlements, Singapore Management University, Bank Negara Malaysia, and the Hong Kong Monetary Authority. We also thank the Directorate General of Statistics of the Banque de France, especially Director General M. Jacques Fournier, and Sylvain Gouteron and Jérémi Montornes for providing the anonymized French bank data on which the disaggregate analysis is based. The opinions expressed in this paper are ours alone and should not be taken to represent the views of the Banque de France or any of the National Central Banks of the Eurosystem or the European Central Bank. Responsibility for any remaining errors rests with us.


In this paper, we argue that banks anticipate short-term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates—a level, slope, curvature model, and a principal components model—before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.