Modelling Interest Rate Pass-through in Rwanda: Are the Interest Rate Adjustment Dynamics Symmetric or Asymmetric?

The influence of monetary policy depends on the effectiveness of the interest rate pass-through, that is the size and the speed to which changes in the central bank policy actions are transmitted to bank retail interest rates. The objective of this paper is to investigate the relationship between the policy-controlled interest rates (Repo and Treasury bill rates) and the bank interest rates (interbank, deposit and lending rates) in Rwanda with a view to empirically examining the size and speed of the interest rate pass-through in the long run and short run and determine whether the passthrough process is symmetric or asymmetric. The empirical results of the paper, using monthly data covering the period from January 2008 to December 2017, indicate that the interbank, deposit and policy rates are cointegrated, hence a non-linear error correction model has been used to assess the asymmetric adjustment dynamics to long-run equilibrium. By contrast, the lending rates were found to be cointegrated with none of the selected policy rates; hence the interest rate pass-through has been estimated by means of a transformed autoregressive distributed lag model. The empirical results of the study show that the estimated long-run as well as the short-run interest rate pass-through of the selected policy rates to deposit and lending rates is weak and sluggish. Regarding the asymmetric adjustment process of the bank rates, empirical results show that depending on the policy rate, the interbank and deposit rates react differently following a negative and a positive shock in the policy rates; but no evidence was provided for asymmetric adjustment of the lending rates.