Core Focus: How CBDC remuneration affects the credit channel of monetary policy, including the impact on bank funding costs, lending rates, and the pass-through of policy rates to the real economy.

In-Depth Notes:
The remuneration of CBDC has significant implications for the credit channel of monetary policy. By providing a risk-free alternative to bank deposits, CBDC affects banks’ funding costs, lending rates, and the overall pass-through of monetary policy to the real economy.

The Impact on Deposit Rates and Bank Funding:
An interest-bearing CBDC affects bank funding costs. Banks are forced to compete with CBDC to retain deposits, which can increase deposit rates. Research shows that CBDC is a perfect substitute for deposits as an electronic means of payment, so the bank is forced to match the CBDC rate one for one . This means that the pass-through of policy rates to deposit rates is potentially stronger with a CBDC. Conversely, a CBDC-induced decrease in bank deposits does not necessarily lead to an equivalent reduction in credit, as banks can optimally replace deposits with wholesale funding .

The Impact on Bank Lending:
CBDC can affect bank lending conditions through multiple channels. Bank funding conditions and potential profitability effects are the main channels through which CBDC could have a bearing on monetary policy transmission via banks . Without policy neutralising actions, the new resulting bank funding mix might be less favourable for banks, thus potentially leading to suboptimal outcomes from a monetary policy perspective, such as restrictions in credit supply. However, CBDC could have a material impact on bank lending conditions only if some relevant frictions, such as collateral constraints or liquidity shortages, materialise . Adverse funding conditions, such as those arising from lower bank liquidity or difficulty to access central bank funding, further paired with a large demand for CBDC, could affect bank lending conditions and the transmission of monetary policy .

The Pass-Through to Deposit Rates:
The pass-through effect is more nuanced. In a world with an imperfectly competitive deposit market, the central bank can boost lending and hence output by increasing the CBDC rate while keeping the reserve rate constant or even reducing it . This contrasts with the traditional view that policy transmission works solely through the reserve rate. A remunerated CBDC can reinforce monetary transmission, provided that the operational design balances effectiveness, financial stability, and fiscal cost . Raising the CBDC rate systematically increases real balance holdings and disciplines the deposit rate, operating as a floor rate for the financial system .

The Central Bank Balance Sheet Identity:
As is the case for banknotes, the central bank balance sheet identity operates as an aggregate consistency restriction that prevents CBDC from creating funding scarcity for the banking system as a whole . This means that the total amount of funding available to banks is not reduced by CBDC issuance, but the composition and cost of that funding may change. Careful design, implementation, and attentive communication can limit an unwarranted tightening coming from funding and liquidity tensions due to the rollout of CBDC .