What this paper is about
This paper examines how changes in New Zealand's Official Cash Rate (OCR) flow through to the mortgage and term deposit rates that banks offer their customers. Using weekly data from ten New Zealand banks spanning over two decades, the study tracks how quickly and fully retail rates respond to monetary policy decisions.
The research uses a method called Panel Local Projection, combined with high-frequency monetary policy surprises, to estimate the “pass-through” effect. It also explores whether pass-through differs depending on whether the OCR is rising or falling, and whether individual banks’ financial characteristics — such as their capital levels or loan quality — affect how they respond to policy changes.
Key findings
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Monetary policy changes do substantially flow through to both mortgage and deposit rates, but the adjustment is gradual.
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Pass-through is significant but slow. In the week of an OCR announcement, only 4 to 11% of the policy change is reflected in retail rates. By 20 to 25 weeks, this rises to around 65 to 75% for most products, and full one-to-one pass-through cannot be rejected for most mortgage and deposit rates at longer horizons.
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Mortgage rates move faster than deposit rates in the short run. Immediately after an OCR change, floating mortgage rates adjust more quickly than term deposit rates. However, 6 and 12 month deposit rates catch up and eventually exceed mortgage rate pass-through by around the 20 to 23 week mark.
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Asymmetry is limited. Pass-through is broadly similar in tightening and easing cycles. The only notable exception is the 1-month term deposit rate, which responds more strongly to OCR decreases than increases — though this product represents a very small share of banks’ funding.
Why we did this research
The substantial increases in the OCR since 2021 — and the subsequent easing — have renewed interest in how monetary policy passes through to the rates actually faced by New Zealand households and businesses. Mortgage lending accounts for roughly 64% of New Zealand banks’ loan portfolios, and most mortgages have short maturities. This structure makes the banking system highly sensitive to short-term interest rate movements. Understanding both the channels and the speed at which OCR changes flow through to retail lending rates is therefore critical for evaluating the effectiveness of monetary policy.
What data have we used?
We use weekly bank-level data on mortgage rates and term deposit rates of New Zealand's ten largest banks, covering the period July 2001 to June 2024.
We use 3 mortgage rates (floating, 6 month, and 12 month) and 3 term deposit rates (1 month, 6 month, and 12 month). The data is published weekly by interest.co.nz and sourced directly from us.
We also use the OCR as our key monetary policy variable, alongside monetary policy surprises constructed from 90-day bank bill futures contracts. Bank balance sheet characteristics — capital ratio, total assets, and non-performing loan ratio — are sourced from us.
As control variables, we include inflation, GDP growth, and housing price inflation from Stats NZ and CoreLogic, as well as NZD/USD and NZD/AUD exchange rates from Reuters and the ANZ Commodity Price Index. Summary statistics for all variables are presented in Table 1 of the paper.