Template-Type: ReDIF-Article 1.0
Author-Name: Ádám Banai
Author-Email: banaia@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (Central Bank of Hungary)

Author-Name: Zsuzsanna Hosszú 
Author-Email: hosszuzs@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (Central Bank of Hungary)

Author-Name: Gyöngyi Körmendi
Author-Email: kormendigyo@mnb.hu 
Author-Workplace-Name: Magyar Nemzeti Bank (Central Bank of Hungary)

Author-Name: Bence Mérő
Author-Email: merob@mnb.hu 
Author-Workplace-Name: Magyar Nemzeti Bank (Central Bank of Hungary)

Title: Impact of base rate cuts on bank profitability
Abstract: The adequate long-term earnings potential of the financial intermediary system is essential from the perspective of financial
stability. Therefore, the impact of economic developments, e.g. monetary policy, on the profitability of the banking system is
an important issue. Central bank interest rate cuts affect the profitability of the Hungarian banking sector through numerous
channels. In our study, we provide an overview of the impact mechanisms relevant to the relationship between the central
bank base rate and banks’ profitability. We then proceed to quantify the impact of an interest rate reduction of 100 basis points
on the profitability of the banking sector. According to our findings, the profitability effect over a two-year horizon amounts
to HUF –26.9 billion (in other words, the average annual difference is HUF –13.4 billion) which, while not negligible, does not
influence the monetary policy transmission materially. Since our calculations depend on the initial status of the macroeconomic
environment, our results should not be applied automatically at any interest rate level.

Classification-JEL: G21, E47 
Keywords: low interest rate environment, profitability of banking sector
Journal: MNB Bulletin
Pages: 18-22
Volume: 9
Issue: 2
Year: 2014
Month: July
File-URL: https://www.mnb.hu/letoltes/banai-hosszu-kormendi-mero.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:bullet:v:9:y:2014:i:2:p:18-22