Monetary policy transmission to mortgages in a negative interest rate environment - No 2243 - February 2019

Sep 4, 2026

Do negative policy rates hinder banks’ transmission of monetary policy? The paper studies Italian mortgage lenders using a novel loan-level dataset. After ECB’s June 2014 introduction of a negative deposit facility rate, banks with higher shares of retail overnight deposits relative to total assets charge more on new fixed rate mortgages. No comparable evidence appears for adjustable-rate mortgages. Household aggregate implications are small, suggesting concerns about inefficient transmission under modestly negative rates may be overstated.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages47

Reading Time1 h 58 min

AccessFree to download

Non-technical summary

Introduction

Abstract

Adrien Amzallag, Alessandro Calza, Dimitris Georgarakos, João Sousa Working Paper Series Monetary policy transmission to mortgages in a negative interest rate environment No 2243 / February 2019 Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB) . The views expressed are those of the authors and do not necessarily reflect those of the ECB. Abstract Do negative policy rates hinder banks’ transmission of monetary policy? To answer this question, we examine the behaviour of Italian mortgage lenders using a novel loan-level dataset. When policy rates turn negative, banks with higher ratios of retail overnight deposits to total assets charge more on new fixed rate mortgages. This suggests that the funding structure of banks may matter for the transmission of negative policy rates, especially for long-maturity illiquid assets. Nevertheless, the aggregate economic implications for households are small, suggesting that concerns about inefficient monetary policy transmission to households under modestly negative rates are likely overstated. JEL classification: E40, E52, E58, G21 Keywords: monetary policy, negative interest rates, bank lending, mortgages Non-technical summary The paper examines whether the introduction of negative policy interest rates hinder banks’ transmission of monetary policy. To that effect, the paper uses a novel loan-level dataset to compare the behaviour of mortgage lending rates in the Italian market before and after the introduction of a negative deposit facility rate by the ECB in June 2014. The paper finds that banks with a higher ratio of retail overnight deposits over total assets tend to charge higher interest rates on fixed rate mortgages originated after the introduction of negative deposit facility rates. At the same time, the paper finds no evidence of significant differences in interest rate-setting behaviour for adjustable rate mortgages across banks with different overnight deposit ratios. This divergence between fixed-rate and adjustable-rate mortgages is consistent with the perspective that banks would be more reluctant to transmit negative deposit facility rates to assets (i.e. mortgages) in which their future income is fixed (i.e. ‘locked in’) than to similar assets where income can adjust based on market conditions (i.e. adjustable-rate mortgages) . In addition, there is evidence to suggest that banks with a higher overnight deposit ratio are more likely to originate adjustable rather than fixed rate mortgages after policy rates turn negative. The paper takes the novel approach of specifically focusing on overnight deposits, in contrast to total deposits, in the presence of negative deposit facility rates. This is because overnight deposits carry rates that are the closest to zero and, therefore, are least likely to be reduced relative to the rates paid out on the various deposit types offered (i.e. overnight, savings, and time deposits) . In this way, banks with a greater share of overnight deposits may find their net interest income ‘squeezed’ once negative deposit facility rates are introduced—lending rates may fall in line with the rate cut but overnight deposit rates may not necessarily follow. In contrast, banks whose assets are funded with other types of deposits (or other liabilities) paying out higher rates have greater freedom to pass through the deposit facility rate cut, thus minimizing pressure on net interest income. These divergences in exposure to the deposit facility rate cut ([i.e. net](i.e. net) interest income pressure) lead banks to behave differently when setting interest rates on fixed rate mortgages, even after taking into account other borrower, loan, and bank features that could play a role. As regards the aggregate economic implications of these empirical findings, the paper shows that while the additional charges on new fixed rate mortgages may not be trivial for a few individual hous

FAQs

How does the paper test whether negative policy rates hinder monetary policy transmission?

It compares mortgage lending behavior in Italy before and after the ECB introduced a negative deposit facility rate in June 2014, using a loan-level dataset.

What effect do negative rates have on fixed-rate mortgage pricing?

Banks with higher ratios of retail overnight deposits to total assets charge higher interest rates on new fixed-rate mortgages originated after policy rates turn negative.

Why do results differ between fixed-rate and adjustable-rate mortgages?

The paper finds the divergence is consistent with banks being more reluctant to transmit negative deposit facility rates to assets whose future income is fixed, rather than to assets with income that can adjust with market conditions.

Sep 4, 2026

Uploaded by Lucas Martin