Valadkhani, Abbas and Anwar, Sajid, Modelling Australia’s Retail Mortgage Rate, Department of Economics, University of Wollongong, Working Paper 01-12, 2012, 28.
There is an ongoing controversy over whether banks’ mortgage rates rise more readily than they fall due to their asymmetric responses to changes in the cash rate. This paper examines the dynamic interplay between the cash rate and the variable mortgage rate using monthly data in the post-1989 era. Unlike previous studies for Australia, our proposed threshold and asymmetric error-correction models account for both the amount and adjustment asymmetries. We found that rate rises have much larger and more instantaneous impact on the mortgage rate than rate cuts, suggesting an urgent need for monitoring the banks’ lending behaviour in Australia.