When mortgage flexibility meets monetary policy tightening: heterogeneous impacts on spending and debt

Philippe Bracke, Matt Everitt, Martina Fazio and Alexandra Varadi

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Macroeconomic Environment Theme which focuses on the changing inflation dynamics and unfolding structural change faced by monetary policy makers.

How do mortgagors adjust spending, savings and debt during monetary tightening? In a recent paper, we explore this question using a novel data set on household transactions and mortgage records. About 30% of households used mortgage flexibility when facing higher borrowing costs since late 2021, as their fixed-rate contracts ended. Some extended repayment periods to lower monthly payments, while others increased borrowing by extracting housing equity – leveraging nominal price gains since the pandemic – to sustain spending and reduce unsecured debt. Those unable or unwilling to use mortgage flexibility, cut spending significantly. We thus document the dual role of mortgage flexibility at refinancing: it helps smooth consumption aiding financial resilience; but it may also dampen monetary policy transmission for some households.

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Muddled measurements on clarity

Charlie Warburton and James Brookes

Economists have repeatedly shown that readability of central banking communication matters. But they typically measure readability in a crude way – using the simplistic but influential Flesch-Kincaid metric. The Flesch-Kincaid Grade Level is based on word and sentence length and is commonly interpreted as the number of years of education required to understand a text. However, recent advances in computational linguistics toolkits empower us to consider finer-grained markers of language comprehension missed by Flesch-Kincaid. Here, we revisit Jansen (2011) which found that Fed Chair testimonies with lower Flesch-Kincaid Grade Level scores – indicating higher readability – were associated with lower market volatility. Our results show that compared to more sophisticated linguistic metrics, Flesch-Kincaid is a relatively poorer indicator of readability.

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What happens to inflation when we put a price on carbon?

Hannah Copeland, Lennart Brandt, Natalie Burr and Boromeus Wanengkirtyo

Emissions Trading Schemes (ETS) are an increasingly popular market-based policy to impose a price on carbon emissions (previously costless to the emitter) (World Bank Group (2025), DESNZ (2025)). With carbon prices expected to increase steadily, and sectoral coverage broadening, these schemes have gained the attention of monetary policy makers (Breeden (2025), Mann (2023)). But what are the implications for inflation? By constructing a new tool (a high-frequency identified ‘instrument’) to measure the impact of supply shocks in the UK carbon market, we document that a tighter carbon pricing regime temporarily increases energy prices and inflation, and decreases output. We find that this shock transmits through multiple energy-related commodity prices, including oil and gas, compounding cost-push pressures arising from the energy sector.

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Once upon a time in the future: strategic foresight in central banks

Julia Giese and Jacqueline Koay

We live in an era of rapid change, complexity and uncertainty. Over recent years, severe global shocks have been frequent, with profound implications for our economy and financial system. Yet such shocks are impossible to forecast with any precision as they are not extrapolations of past relationships. Our economy and financial system are subject to longer-running trends such as technological advances, demographics, geopolitical shifts and climate change which can be blown off course or altered in unexpected ways. Where forecasts are bound to fail, strategic foresight tools can help as they are a means for practitioners to understand the dynamics of change (and how this could impact the economy and financial stability) by imagining different futures and telling stories around how trends might interact to give rise to unforeseen shocks.

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