The pricing behaviour of Australian banks and building societies in the residential mortgage market

• This paper examines how mortgage interest rates are affected by the cash rate.
• GFC significantly increased mortgage rates for all lenders particularly banks.
• Three largest banks respond asymmetrically to changes in the cash rate.
• Significant evidence of the adjustment asymmetry is also found among 8 lenders.
• Overall building societies provide more competitive mortgage rates than banks.

This paper examines if the dynamic interplay between the Reserve Bank of Australia's (RBA) cash rate and the standard variable mortgage rates of 23 major lenders is subject to both the amount and adjustment asymmetries. Using weekly data (2000–2012), the cash rate and lending rates are pairwise cointegrated. An asymmetric short-run dynamic model is then estimated in which both the size and sign of disequilibria are taken into account. Significant evidence of the adjustment asymmetry is found among 8 lenders (including all foreign subsidiary banks). This paper also finds that the three largest domestic banks pass on the RBA's official rate rises to borrowers more than they do for rate cuts, affecting the efficacy of expansionary versus contractionary monetary policy.