Monetary Policy Transmission to Lending Rates: Evidence from Brazil

This paper estimates the strength of monetary policy transmission to bank lending rates in Brazil. We identify monetary policy shocks using forecast errors from Brazi’s daily Focus survey of professional forecasters. We then estimate the pass-through to lending rates based on an instrumental variable application of local projections and find an aggregate pass-through of 70 percent after four months, reflecting full passthrough to market-based lending rates and 20 percent to government-directed credit interest rates. Analysis using bank-level data reveals varying degrees of pass-through across credit types, from 40 percent for payrollbacked loans to 80 percent for working capital loans, and stronger pass-through for larger banks. Estimated pass-through has increased since 2020 due to more responsive corporate loans