Deposit and Lending Interest Rate Pass‐Through: Evidence From Selected Euro Area Countries

ABSTRACT This study examines how deposit and lending interest rates adjust to changes in two proxies for funding costs in the banking systems of the Euro area from January 2003 to July 2024. Using a panel framework and dynamic pooled least squares with cross‐section fixed effects, we analyze both long‐ and short‐run pass‐through from two funding‐cost proxies, the European Central Bank (ECB) policy rate and 10‐year government bond yields, to retail interest rates. The results provide robust evidence of asymmetric interest rate pass‐through, consistent with the ‘rockets‐and‐feathers’ phenomenon. Deposit and lending rates respond fully or even more than fully to increases in funding costs during periods of monetary tightening, whereas adjustments are incomplete or, in some cases, negative during periods of monetary easing. Short‐run responses are modest, with both deposit and lending rates adjusting more rapidly to increases than to decreases, highlighting persistent downward rigidity. These patterns suggest that contractionary monetary policy is more effective than expansionary policy, as negative pass‐through during easing phases indicates that lower policy rates are not fully transmitted to retail rates in the Euro Area.