Downward stickiness of interest rates in the Australian credit card market

Abbas Valadkhani, Sajid Anwar & Amir Arjomandi  Pages 52-65 | Published online: 07 Jun 2013

Abstract

This paper measures the full extent of downward stickiness in credit card interest rates by testing for the amount and adjustment asymmetries. We found that lenders behave asymmetrically in response to changes in the Reserve Bank of Australia's (RBA) cash rate. The RBA's rate rises are passed on to borrowers much faster than rate cuts and the aggregate credit card interest rate showed a very resilient degree of downward rigidity. Overall, based on the estimated short-run dynamic model, banks immediately pass on 112% of any RBA's rate rises, but only 53.7% of any rate cut. In other words, the short-run effects of rate cuts were not only less than half of the rate rises but also were delayed on average by two months. As far as changes in the credit card interest rate are concerned, an expansionary monetary policy is thus less effective than a contractionary policy.

 3.6 Professor Valadkhani provided the committee with research he had undertaken indicating that credit card providers appear to behave asymmetrically in response to changes in the RBA cash rate. According to Professor Valadkhani, between 1990 and 2012 the banks had immediately passed on 112 per cent of RBA cash rate increases (the full value of increases, plus 12 per cent), but only 53.7 per cent of rate cuts: but cuts were delayed by an average of two-and-a-half months. Professor Valadkhani has suggested this asymmetry is an example of the 'rockets-and-feathers' effect: credit card interest rates 'shoot up like a rocket' in response to RBA cash rate increases, but 'float down like feather' when the cash rate is decreased.4  This means that over time the gap between the RBA cash rate and credit card interest rates has grown, and consumers have been left paying higher rates of interest overall.