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The transmission of monetary policy: from mortgage rates to consumption

Author

Listed:
  • Baptista, Pedro
  • Dossche, Maarten
  • Hannon, Andrew
  • Henricot, Dorian
  • Kouvavas, Omiros
  • Malacrino, Davide
  • Zimmermann, Larissa

Abstract

This article analyses the transmission of monetary policy to consumption via its impact on mortgage payments. Simulations using the current distribution of loans across households show that, despite rate cuts, a substantial part of past tightening is still in the pipeline. The average interest rate on outstanding mortgages is expected to continue to increase, translating into a persistent drag on the expected consumption recovery. Lower-income households were affected earlier in the cycle and will be the most affected by 2030 in cumulative terms, disproportionately weighing on consumption due to their higher marginal propensities to consume. The estimates suggest that up to 35% of the overall impact on consumption via this mortgage cash flow channel has not materialised yet. This delayed drag distinguishes the current easing cycle from previous ones. It reflects (i) the fact that the latest hiking cycle started after a long period of low rates, (ii) the less complete pass-through of hikes due to the higher share of fixed-rate mortgages and the pace and magnitude of the tightening cycle, and (iii) the outlook for the current interest rate cycle, which is expected to leave interest rates on new loans at higher levels than before 2021. JEL Classification: E52, G21, G51

Suggested Citation

  • Baptista, Pedro & Dossche, Maarten & Hannon, Andrew & Henricot, Dorian & Kouvavas, Omiros & Malacrino, Davide & Zimmermann, Larissa, 2025. "The transmission of monetary policy: from mortgage rates to consumption," Economic Bulletin Articles, European Central Bank, vol. 4.
    • Handle: RePEc:ecb:ecbart:2025:0004:1
    Note: 3577821
    as

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    More about this item

    Keywords

    household heterogeneity; Monetary policy; mortgages;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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