SUERF Policy Brief
by Christoph Basten & Ragnar Juelsrud
Changes in monetary policy rates are passed through to deposit rates incompletely, reducing the attractiveness to bank clients of deposits relative to assets with higher pass-through after policy rate hikes. This reduces deposit growth and, with deposits as primary refinancing, loan growth following monetary tightening, which supports monetary policy transmission. In the leading explanation of incomplete pass-through, banks maximize current deposit profits. But that cannot explain why banks pay deposit rates above policy rates when policy rates are low. We reconcile incomplete pass-through and loss-making deposit pricing with banks trading off short-term losses on deposits against long-term profits from later cross-selling other products to depositors. We confirm this in Norwegian data on every bank household relationship. Given heterogeneity in demographics and in cross-selling potential across the euro area, this implies also heterogeneities in monetary policy transmission.