IMF warns BoE against keeping UK interest rates high due to fixed-rate mortgages | economics

The high proportion of UK homeowners using fixed-rate mortgages means the Bank of England must be wary of keeping interest rates too high for too long, the International Monetary Fund (IMF) has warned.

The IMF said many borrowers have so far been shielded from the impact of higher interest rates, and there is a risk of lower consumption, lower house prices and more defaults as austerity policies finally take effect.

The Washington-based organization's chapter on future global economic outlook does not single out any specific central bank, but research shows that Britain is one of the countries with the highest rates of fixed-rate mortgages, a trend that has grown rapidly in popularity over the past decade. This leads to the start of the COVID-19 pandemic (global pandemic).

Threadneedle Streets The Monetary Policy Committee raised interest rates 14 times between December 2021 and August 2023 but kept borrowing costs down to 5.25% despite the annual inflation rate falling from 6.7% to 3.4% since last summer. I kept it as is.

The IMF said the impact of interest rate hikes tends to be weaker in countries with higher rates of fixed-rate mortgages. In the UK, more than 80% of home loans are for fixed terms, typically five years or less. More than 1.5 million fixed-rate mortgages will end in 2024.

Most central banks have made significant progress toward their inflation targets. It can be seen from the discussion that it is always cheaper to err on the side of tightening too much when the transmission is weak. But maintaining excessive tightening or interest rate hikes for a long period of time could nevertheless present a greater risk for now, the IMF said.

In fact, fixed-rate mortgages have become more common in many countries, but the fixed periods are often short. If mortgage rates reset over time, monetary policy transmission could suddenly become more effective, dampening consumption, especially where households are highly indebted.

The higher the time ratio, the more likely it is that households will feel pressured, even if they have hitherto been relatively protected.

The IMF said many households around the world took advantage of low interest rates to secure low-interest mortgages before and during pandemic lockdowns. When central banks began tightening policy, real mortgage rates in many countries reached their lowest point in decades. The combination of low interest rates and structural changes has led to a sharp rise in house prices around the world, with some countries already seeing their property markets rise.

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As mortgage rates reset over time, monetary policy transmission could suddenly become more effective, dampening consumption, the IMF said. Central banks are already factoring this possibility into their decision-making, but the impact on consumption could still be larger than expected.

If defaults suddenly increase, financial instability may follow. This is especially true in countries where households have high debt or bankruptcy laws favor borrowers.

The IMF said the surge in house prices during the pandemic had left some markets overvalued, and that this was more likely to correct if interest rates remained high for an extended period of time.

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