Cost versus availability of loans: which matters more for mortgagors?

Alexandra Varadi

In early 2000s, mortgage debt increased rapidly relative to income.  A key driver of this was an expansion in credit supply that made credit cheaper and more widely available. But, it is largely unknown if it is the cost of borrowing or the availability of loans that matters more for mortgagors. I examine this question in a recent paper. I find that increasing loan availability, notably at high loan to value (LTV) or high loan to income (LTI) ratios, increases household borrowing and improves credit access. The cost of borrowing matters too. It is a strong determining factor for mortgagors closer to borrowing limits, and for middle-aged borrowers. And, reducing borrowing costs in tandem with higher loan availability strongly amplifies mortgage borrowing.

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The impact of shipping costs and inflation

Tugrul Vehbi, Serdar Sengul, Daniel Christen, Lucio D’Aguanno and Tom Wise

Shipping costs have increased sharply since the onset of the pandemic, to a magnitude perhaps only a few would have predicted. In this post, we examine the likely drivers and impact of this increase. We argue that (i) both demand and supply factors are responsible for these developments with the former playing a relatively bigger role historically; (ii) shipping costs feed through to consumer prices with a lag; and (iii) therefore, we may expect to see further price pressures in some advanced economies (eg the US and the euro area) from recent surges in shipping rates.

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Diversity in UK banks – the long journey continues

Joel Suss, Marilena Angeli and Peter Eckley

Diversity has risen up the agendas of businesses, regulators, and governments in recent years. How diverse are the upper echelons of banks and building societies in the UK? We answer this question in a recent paper using a unique data on the most senior employees for the last 20 years.

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An unintended consequence of holding dollar assets

Robert Czech, Shiyang Huang, Dong Lou and Tianyu Wang

During the March 2020 ‘dash for cash’, 10-year gilt yields increased by more than 50 basis points. This huge yield spike was accompanied by the heavy selling of gilts by mutual funds and insurance companies and pension funds (ICPFs). Focusing on the latter group, we argue in a recent paper that ICPFs’ abnormal trading behaviour in this period was partly a result of the dollar’s global dominance: ICPFs invest a large portion of their capital in dollar assets and hedge these exposures through foreign exchange (FX) derivatives. As the dollar appreciated in March 2020, ICPFs sold large quantities of gilts to meet margin calls on their short-dollar derivative positions, contributing to the yield spike in the gilt market.

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Sluggish deposit rates and the effects of monetary policy

Alberto Polo

Could the slow response of deposit rates to changes in monetary policy strengthen its impact on the economy? At first look, the answer would probably be ‘no’. Imperfect pass-through of policy to deposit rates means that the rates on a portion of assets in the economy respond by less than they could. But what if this meant that the rates on other assets responded by more? In a recent paper, I develop a model that is consistent with a number of features of banks’ assets and liabilities and find that monetary policy has a larger effect on economic activity and inflation if the pass-through of policy to deposit rates is partial.

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The Bank of England’s 2022 Priority Topics for research

Alongside our multi-year ‘Bank of England Agenda for Research’, the Bank also publishes a set of ‘Priority Topics’, which change each calendar year. The new 2022 Priority Topics are now available on the Bank’s website (see ‘2022 Priority Topics’ under each theme).


Rebecca Freeman, Managing Editor.

Words which travel the world: global spillovers of the Fed information effect

Marco Pinchetti and Andrzej Szczepaniak

It is certainly not a mystery that the Fed’s monetary policy is of great importance for financial markets and the global economy. However, in a recently published Staff Working Paper, we show that the Fed’s monetary policy measures are not the only valuable piece of information contained in the Fed’s announcements. Changes in the Fed’s economic assessment drive investors’ risk behaviour and international capital allocation decisions. Through this channel, changes in Fed views can affect financial conditions and economic activity in the rest of the world, independent of policy actions. 

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The macroprudential toolkit: effectiveness and interactions

Stephen Millard, Margarita Rubio and Alexandra Varadi

The 2008 global financial crisis showed the need for effective macroprudential policy. But what tools should macroprudential policy makers use and how effective are they? We examined these questions in in a recent staff working paper. We introduced different macroprudential tools into a dynamic stochastic general equilibrium (DSGE) model of the UK economy and compared their impact on the economy and household welfare, as well as their interaction with each other and with monetary policy. We found that capital requirements reduce the effects of financial shocks. Instead, a limit on how much of borrowers’ income is spent on mortgage interest payments reduces the volatility of lending, output and inflation resulting from housing market shocks.

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Preferred habitat behaviour in the gilt market

Julia Giese, Michael Joyce, Jack Meaning and Jack Worlidge

Every financial market transaction has two parties, each with their own preferences. One channel through which quantitative easing works rests on these differences: preferred habitat investors value certain assets above others for non-pecuniary reasons, beyond risk and return. Central bank asset purchases of the preferred asset create scarcity, which may lead to compensating price adjustment, with spillovers to other assets and the macroeconomy. There is, however, little hard evidence on these investors. In a staff working paper, we use a new granular data set on gilt market holdings and transactions to identify groups of investors with preferred portfolio duration habitats. We present a case study suggesting that the Bank’s purchases appear to have come disproportionately from one group of these investors with a relatively strong preference for specific gilt maturities.

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The costs and benefits of reducing the cyclicality of margin models

Nicholas Vause and David Murphy

Following a period of relative calm, many derivative users received large margin calls as financial market volatility spiked amidst the onset of the Covid-19 (Covid) global pandemic in March 2020. This reinvigorated the debate about dampening such ‘procyclicality’ of margin requirements. In a recent paper, we suggest a cost-benefit approach to mitigating margin procyclicality, whereby alternative mitigation strategies would be assessed not only in terms of the reduction in procyclicality they would deliver (the benefit), but also any increase in average margin requirements over the financial cycle (the cost). Strategies with the best trade-offs could then be put into practice. Our procyclicality metrics could also be used to report margin variability to derivative users, assisting them with their liquidity risk management.

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