The interest rate transmission mechanism and the management of interest margin in the context of Czech national bank disinflation policy

The paper analyzes the relationship between interest rate transmission mechanism and bank's management of interest rate risk during the disinflation monetary policy in the Czech Republic in 1999-2006. In theoretical part, main determinants of short-run and long-run equilibrium of client interest rates are discussed (market power, duration of credits and deposits, pricing mechanism, credit risk, operation efficiency). Using the error correction model, sensitivity of credit and deposit interest rates on market interest rates is tested. It is found out that in the short equilibrium client interest rates changes follow dynamics of CNB repo rate, the sensitivity of credit and deposit interest rates differs and banks face up the pressure on interest margin. The cointegration analysis confirms change of equilibrium interest rate margin in the long-run and supports hypothesis of consistency between Czech National Bank monetary policy and its expected outcomes by banks.