Monetary policy transmission in Zambia: pass-through from the bank of Zambia policy rate to commercial banks market interest rates

This study investigates the monetary policy transmission in Zambia by examining the magnitude and speed of the pass-through from the Bank of Zambia policy rate to commercial bank interest rates using the Johansen cointegration approach. The study also investigates the symmetric/asymmetric behavior of the pass-through with respect to particular monetary policy stance undertaken. Using monthly time series data consisting of Bank of Zambia Policy Rate, interbank rate, commercial banks’ lending and deposit rates, the empirical results reveal that there is incomplete but high pass-through from the Bank of Zambia policy rate to the short-term interbank rate. Subsequently, the pass-through from the interbank rate to commercial bank interest rates is incomplete, low and slow, implying that commercial banks adjust their interest rates in response to changes in policy rate by a small margin and with long lags. This suggests that commercial banks exhibit high rigidity in response to monetary policy changes via the interbank rate. The pass-through appears to be asymmetric with deposit rates exhibiting high downward flexibility during expansionary monetary policy episodes and lending rates exhibiting high upward flexibility during contractionary monetary policy periods. Therefore, study proposes the need for undertaking further studies that will help establish the weak link between the interbank money market and the commercial banks’ retail market by investigating the causes or determinants of commercial banks interest rates rigidity. Keywords: Policy Rate, Interbank Rate, Pass-through, symmetric/asymmetric, VECM