How Do Interest Rates Affect Consumption? Household Debt and the Role of Asset Prices

Angus Foulis, Jonathon Hazell, Atif Mian and Belinda Tracey

No 21243, CEPR Discussion Papers from Centre for Economic Policy Research

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 pp reduction in mortgage rates raises consumption by 3% in the following 6 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.

Date: 2026-03
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