Post COVID-19 has seen the rapid rise in prices globally which in turn has led central banks implementing a tight monetary policy (higher interest rates) to counter this rise in inflation. The impact on consumers of higher interests depends in their current financial situation. In most economies a mortgage is the largest liability that consumers have and the property market is a large part of the economy. Mortgages can be fixed or floating and research from the IMF show that fixed-rate mortgages have become more common globally – see image. Fixed-rate mortgages vary – close to zero in South Africa to more than 95 percent in Mexico or the United States.
- Those on floating rates = payments rise with higher interest rates so monetary policy is more effective
- Those on fixed rates = payments stay the same for the duration of the fixed term so monetary policy is less effective
The effects are greater where mortgages are larger compared to home values and in countries where household debt to GDP is high. Therefore consumers are more exposed to changes in interest rates. Nevertheless there will be a time when fixed mortgages reset and you could see a big drop in consumption and a more effective monetary policy. The timing of the reset is crucial as the new rate will most likely be linked to the central bank rate at the time, with the latter being indicative of inflationary conditions. See monetary policy transmission mechanism below.
Countries mortgage markets vary – where there is a declining share of fixed mortgage rates, greater debt and limited housing supply monetary policy is more effective as higher interest rates cut into consumers disposable income e.g. Canada and Japan. Monetary policy seems to have weakened in its impact in countries such as Hungary, Ireland, Portugal and the US where the reverse applies in some areas.
Source: IMF Blog – Housing is One Reason Not All Countries Feel Same Pinch of Higher Interest Rates
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