Bank of England working paper finds mortgage rate cuts raise UK consumption mainly via higher house prices and borrowing

The Bank of England published Staff Working Paper No. 1,173 analysing how mortgage-rate changes transmit to household consumption through debt and asset prices. Using UK administrative data, the authors estimate that a 1 percentage point reduction in mortgage rates raises mortgagors’ consumption by about 3% over the following six months, with the increase driven primarily by borrowing against higher house prices rather than by lower debt-servicing costs. The study exploits the staggered expiry of fixed-rate mortgage deals to construct around six million household-level natural experiments, combining Financial Conduct Authority Product Sales Data on regulated mortgage contracts with transaction-level spending from personal finance apps. In the baseline estimates, a 1 percentage point mortgage-rate cut increases cash-on-hand by around GBP 1,800 over six months and borrowing accounts for roughly two thirds of that response. Regions where house prices do not respond to rate cuts show materially smaller borrowing and consumption effects, while the average region’s house prices rise by about 6% for each 1 percentage point rate cut; the implied marginal propensity to consume out of higher housing wealth is estimated at around 0.04, with larger responses among more highly leveraged households. The paper also argues that staggered deal expiries create long and variable lags in aggregate consumption effects, with the cumulative impact of a rate cut taking around 50 months to play out and becoming more back-loaded as typical mortgage deal lengths increased over the sample. As a staff working paper, it is intended to elicit comments and does not represent Bank of England policy.