Impact of Monetary Policy on Mortgage Rates in Russia’s Regions

Based on panel data analysis of weighted average interest rates in Russia’s regions, this paper documents differences in the responses of regional mortgage markets to changes in money market rates (in this instance, MIACR), which are influenced primarily by changes in the key rate of the Central Bank of Russia. The efficiency of monetary transmission is significantly affected by the degree of competition in regional mortgage markets. The authors propose that this may be explained by the different roles that money market instruments play as a source of liabilities for particular banks and, therefore, by variations in the amplitude of transmission of money market rates into mortgage rates. In addition, mortgage interest rates are influenced by the amount of competition in a regional mortgage market as well as by the purchasing power of borrowers in housing markets and by the quality of life in the Russian regions. This is explained via the standard microeconomic logic of market structures and the role of the PTI (the payment-to-income ratio, which indicates how much of a borrower’s income is spent on loan repayment) in determining degree of risk and ultimately the risk premium. The amount of migration into a region is also negatively correlated with mortgage interest rates.