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

Angus Foulis, Jonathan Hazell, Atif Mian and Belinda Tracey
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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

No 1173, Bank of England Staff Working Paper series from Bank of England

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.

Keywords: Monetary policy; interest rates; consumption; household debt; asset prices. (search for similar items in EconPapers)
JEL-codes: E21 E43 E52 G21 G51 R31 (search for similar items in EconPapers)
Pages: 124
Date: 2026-02-27
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023295

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