Are Domestic Banks’ Interest Rate Pass through Higher than Foreign Banks? Empirical Evidence from Pakistan

This study contributes to the literature by estimating Interest Rate Pass Through (IRPT) using Pakistani aggregate banks’ lending and deposit rate data. Lending and deposit rates are estimated to be sluggish in terms of their response to a change in monetary policy rate. There is also evidence of asymmetry in the pass through of four types of banks (i.e., privatized, nationalized, foreign and specialized). Overall, the domestic banks’ pass through is estimated to be higher than that of foreign bank. Although the IRPT is estimated to be incomplete, the degree of lending rate pass- through is not very low. This study provides evidence of an increase in the adjustment speed when the lending rate is below equilibrium after January 2005. However, there was no significant change in the pass through after January 2005 which coincided with the constant increase in the Treasury bill rate by the State Bank of Pakistan.