Rate pass-through

The share of a change in the central bank's policy rate that an institution actually passes on to its savers.

Example

An account paying 1.20% against a 4.00% policy rate is a pass-through of 30.0%; the same account may move only 0.40 of a point when the policy rate rises a full point, and the whole point when it falls.

Important

Pass-through is routinely asymmetric - slower up than down - and nothing improper has happened when it is. It is paid in income never credited rather than in a fee charged, which is why it appears on no statement.

Related terms

• Policy rate — The benchmark interest rate set by a central bank, which the rates institutions offer savers and charge borrowers are set with reference to.
• Bank deposit — Money handed to a bank in exchange for a claim on it. The bank owns the money and lends most of it out; what you hold is a debt that institution owes you, repayable on the terms of the account.
• Opportunity cost — What you give up by choosing one use of your money, or time, over the next-best alternative.

Lessons that explain it

• The spread between the policy rate and what you are offered — There is no market price here. The price is the gap between what the central bank sets and what the institution passes on - and that gap widens and narrows in a pattern that is not symmetric. (11 min)

All 578 terms in the Investing glossary