An analysis in 2019 of its forecasts by Innes McFee of Oxford Economics, another consultancy, suggested that the bank thought interest-rate rises after 2017 would have a bigger effect on GDP than in the 2000s. Its strategy of raising interest rates before unwinding the asset purchases with which it fought first the global financial crisis and then the effects of covid-19 results partly from its confidence that it understands the effects of the former. The Bank of England seems confident that interest-rate rises will have plenty of oomph, for example in influencing credit for businesses. That would lessen the squeeze on credit associated with higher official rates. If the main policy rate increases, says Neal Hudson of BuiltPlace, a consultancy, there could be pressure to weaken that test to avoid shutting first-time buyers out. Regulatory changes meant to ensure affordability mean that since 2014, they must show that they can cope with a rise of three percentage points within five years of taking out a loan. That leaves first-time buyers and people refinancing their mortgages. According to figures from UK Finance, an industry group, mortgages with fixed rates have relatively large outstanding balances, meaning that the homeowners who would suffer most from higher interest rates are most likely to be shielded from them, at least in the short term. Fixed-rate terms have grown longer, and since mid-2020 the majority of fixed-rate mortgages have been set for five years.

That share is now less than 20% (see chart). Moreover, mortgages with floating rates accounted for over half the stock in 2006, and over 70% in the early 2010s. The share of Britons living in homes that are owned outright has risen from 25% in 2006 to 29% this year. This shift has been driven by population ageing, which means more homeowners have paid off their mortgages, and by a rise in the average age of first-time buyers. In mid-2006 around 46% of Britons lived in a home with an outstanding mortgage now, only around 37% do. Today’s monetary policymakers face a very different mortgage market to that 15 years ago. That helps explain why British mortgage-interest payments were nearly three times as responsive to changes in official interest rates after four years as were American ones. In America, however, mortgage interest rates are usually fixed for decades. Historically, Britain was a nation of floating-rate mortgages, with payments rising and falling with the official interest rate. The same study found that how many households have mortgages matters a lot: spending by outright homeowners barely responded to changes in official interest rates.

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