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How do interest rates affect consumption? Household debt and the role of asset prices

Author

Listed:
  • Angus Foulis

    (Bank of England and CfM)

  • Jonathan Hazell

    (London School of Economics and CEPR)

  • Atif Mian

    (Princeton University and NBER)

  • Belinda Tracey

    (Bank of England, CEPR and CfM)

Abstract

This paper estimates how rate cuts increase consumption, via debt and asset prices. Using administrative UK data on mortgages and consumption, we exploit the expiry of fixed-rate mortgages to construct six million household-level natural experiments. A 1 percentage point reduction in mortgage rates raises consumption by 3% in the following six months. Using plausibly exogenous variation in how house prices respond to rate cuts, we show that consumption increases mostly because households borrow against higher house prices; lower debt service after rate cuts matters less. These results suggest that in large part, monetary policy affects consumption through asset prices and borrowing.

Suggested Citation

  • Angus Foulis & Jonathan Hazell & Atif Mian & Belinda Tracey, 2026. "How do interest rates affect consumption? Household debt and the role of asset prices," Bank of England Staff Working Paper series 1173, Bank of England.
    • Handle: RePEc:boe:boeewp:023295
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2026/how-do-interest-rates-affect-consumption-household-debt-and-the-role-of-asset-prices.pdf
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    References listed on IDEAS

    as
    1. Bosshardt, Joshua & Di Maggio, Marco & Kakhbod, Ali & Kermani, Amir, 2024. "The credit supply channel of monetary policy tightening and its distributional impacts," Journal of Financial Economics, Elsevier, vol. 160(C).
    2. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
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    Cited by:

    1. Jordan Roulleau-Pasdeloup, 2026. "The Response of Consumption to Interest Rates with Borrowing Constraints: An Analytical Approach," Papers 2609.09888, arXiv.org.

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    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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