Much of the literature on interest rate pass through assumes banks set retail rates by observing current market rates. We argue instead that banks anticipate the direction of short-term market rates when setting interest rates on loans, mortgages and deposits. If anticipated rates - captured by...

In this paper we argue that banks anticipate short-term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates - a level, slope, curvature model and a principal components model -...