Colombian Monetary Policy Interest Rate: Its Expectations and the Pass-Through to Interest Rates of CDs and Credit

Borradores de Economia
Number: 
1327
DOI: 
https://doi.org/10.32468/be.1327
Published: 
Authors:
Julián Alonso Cárdenas-Cárdenase,
Deicy Johana Cristiano-Botiaa,
Eliana Rocío González-Molanoa,
Carlos Alfonso Huertas-Camposa
Classification JEL: 
E4, E5, D8
Keywords: 
Monetary policy, Interest rate pass-through, Expectations
Abstract: 

The credibility of a central bank is reflected in the agent’s expectations of the monetary policy interest rate (MPR) and affects the behavior of interest rates in the economy. This document includes these expectations in various models that estimate the pass-through of monetary policy to CD and credit interest rates for the Colombian case. Compared with previous works that only include the observed MPR, the models that incorporate MPR expectations show stronger correlations with CD and credit rates, and faster transmission. It was also found that when analyzing periods of increases and decreases of the MPR, the transmission is asymmetric. However, it was found that the asymmetry in transmission between periods of MPR increases and decreases varies over time. In the short term, transmission tends to be more rapid during phases of MPR decline. Conversely, over longer horizons, transmission appears to be more pronounced during periods of MPR increase.

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Approach

This document analyzes the transmission of changes in the monetary policy rate (MPR) to the interest rates of deposits (CDs) and credits, incorporating agents’ expectations regarding the future dynamics of the MPR. Using econometric models, the study seeks to answer key questions in the analysis of the pass-through: 
(i) How long does it take for changes in the MPR to be transmitted to CDs and credit interest rates? 
(ii) What factors affect this pass-through? 
(iii) Are there asymmetries in this pass-through?

Contribution

This study explicitly incorporates expectations about the monetary policy rate (MPR), measured through both surveys of economic analyst expectations and market instruments (such as overnight indexed swaps – OIS), to analyze their influence on the pass-through from the MPR to CDs and credits interest rates in Colombia. Unlike previous studies that considered only the observed MPR, this research highlights the role of expectations in the transmission process. It also emphasizes the importance of expectations as a signal of the Central Bank’s credibility.

Expectations about the monetary policy rate (MPR) play a key role in the transmission to deposit and credit interest rates. This process is neither immediate nor uniform across financial products. 

Findings

The credibility of the Central Bank of Colombia (Banco de la República) plays a key role in how its decisions regarding the monetary policy rate (MPR) affect market rates. When market agents trust the Bank’s decisions, they are better able to anticipate future movements, which facilitates a faster response in CDs and credits rates. This study analyzes how such expectations influence the transmission of the MPR to market interest rates in Colombia. By including expectations in the models, the transmission is observed to be faster than in previous studies.

The results show that transmission is neither immediate nor uniform across financial products: CD rates react faster than credit rates. Additionally, unexpected changes in the MPR affect deposit rates first, followed by loan rates. The transmission is also asymmetric, in the short term, transmission tends to be faster during phases of MPR decline. Conversely, over longer horizons, transmission is more pronounced during periods of MPR increase.