Interest Rate Pass-Through in Euro Area Mortgage Markets: The Long Shadow of the Great Financial Crisis

The tightening of monetary policy in response to the recently observed surge in inflation has focussed attention on the potential impact of changes in policy rates on European mortgage holders. Central to this question is the pass-through of policy rates to the mortgage rate charged in residential markets across the Euro Area as housing costs have contributed significantly to recent inflationary pressures. In particular, how much and how quickly does the change in the Euro Area policy rate pass-through to the mortgage rate in a particular member country’s market? The effectiveness of the monetary policy transmission mechanism has been impaired in a number of ways by the continuing effects of the great financial crisis (GFC). In this article, we seek to examine the manner in which the pass-through relationship between Euro Area policy rates and representative mortgage market rates has been impacted by financial sector considerations such as the degree of concentration in the sector, banks’ holdings of impaired loans, and the overall level of financial stress in the economy. Overall, our empirical findings indicate the level of financial stress experienced during the GFC has had a major impact on the effectiveness of monetary policy transmission in the Euro area. This article suggests that the GFC still has implications for the efficacy of current monetary policy in the Euro Area through several different but related channels. (JEL codes: E52, F45, and G21)