How efficient is monetary policy transmission in the UK?

The recent shift from floating rate mortgages to fixed rate mortgages in the UK has dampened the pass-through of the Bank of England’s monetary policy, with fewer households experiencing an immediate change in interest expenses than before.

Historically low interest rates on existing mortgages have discouraged UK homeowners to refinance their mortgages, further weakening the transmission of monetary policy.

The prevalence of fixed-rate mortgages and the relatively low share of homeowners with outstanding mortgages have helped consumer spending remain relatively resilient over the past year. The move away from variable to fixed rate mortgages mitigated the lagging impact of rate hikes on the broad economy since late 2021. The weakening of monetary transmission can also be seen in the relative resilience of corporate lending in changes of policy rate.

The Bank of England decided to cut its policy rate by 25 basis points in August, following twelve consecutive months of holding the rate steady, bringing it down to 5%. The slow pass-through rate of policy changes to the economy bolsters our case for three cuts in total this year, with the second cut expected to occur in September.