CPI-weighted wage growth

Josh Martin

The Monetary Policy Committee has recently looked at wage growth as an important indicator of inflation persistence. One way that wages matter for price inflation is as a cost for businesses, who may raise their prices in response to higher wages. For this channel, the wage measure needs to reflect the coverage and composition of the Consumer Prices Index (CPI). However, most wage measures do not. This blog explores a wage growth measure which is re-weighted to better match the CPI.

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Mortgage affordability for borrowers who re-fixed in 2023

Daniel Norris, Elio Cucullo and Vasilis Jacovides

When borrowers enter a fixed-rate mortgage, lenders test whether they could continue to afford their mortgage if interest rates were to increase by the time it comes to re-fix. This ‘stressing’ is designed to create additional resilience for borrowers and the financial system. Over the last two years, mortgage rates have increased by over four percentage points, raising the cost of repayments for those re-fixing. We look at UK mortgage data and compare the stress rates applied at origination to rates available to borrowers when re-fixing. We find that the vast majority of borrowers who came to the end of their fixed terms in 2023 faced new mortgage rates which were lower than those they had been ‘stressed’ at.

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Schrodinger’s market: what the quantum internet could mean for the financial system

Ed Hill

Once the stuff of science fiction, quantum technologies are advancing fast. Individual quantum computers are finding a range of applications, primarily driven by the immense speed-ups they offer over normal computers. And soon the nascent quantum internet should connect those isolated computers together. This blog post starts to think about what this new interconnected quantum world means for the financial system. What could the first ‘quantum markets’ look like? What algorithms and infrastructure might they leverage? And where might the differences from classical markets lie?

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Beyond the average: patterns in UK price data at the micro level

Lennart Brandt, Natalie Burr and Krisztian Gado

The Bank of England has a 2% annual inflation rate target in the ONS’ consumer prices index. But looking at its 700 item categories, we find that very few prices ever change by 2%. In fact, on a month-on-month basis, only about one fifth of prices change at all. Instead, we observe what economists call ‘sticky prices’: the price of an item will remain fixed for an extended amount of time and then adjust in one large step. We document the time-varying nature of stickiness by looking at the share of price changes and their distribution in the UK microdata. We find a visible discontinuity in price-setting in the first quarter of 2022, which has only partially unwound.

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How auction design can make a difference: the case of the Bank’s Indexed Long-Term Repo Facility

Julia Giese and Charlotte Grace

In response to the global financial crisis, the Bank of England (BoE) began using Product-Mix Auctions (PMA) to provide liquidity insurance to financial institutions. The PMA, designed by Paul Klemperer, allows the quantity of funds lent against different types of collateral to react flexibly to the economic environment and market stress. It maximises overall surplus, or ‘welfare’, assuming bidders bid their true values for loans. Mervyn King, the then BoE Governor, described the BoE’s use of PMAs as ‘a marvellous application of theoretical economics to a practical problem of vital importance‘. In this post, we describe a staff working paper that shows that the PMA generates welfare gains relative to simpler alternative auction designs, which cannot achieve such fine-tuned responses.

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Our top five posts of 2023

Rebecca Freeman

As another year draws to an end and the blog prepares for some downtime over the festive period, we wanted to take a look back at the blog in 2023.

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Is UK monetary policy driving private housing rents?

Daniel Albuquerque and Jamie Lenney

Rent prices have risen by 9% on average in England since the Bank of England’s Monetary Policy Committee (MPC) started raising interest rates in December 2021. Alongside this rise in prices has been a widening in the gap between reported supply and demand in the rental sector, with tenant demand continuing to rise in 2023 amidst falling supply (RICS survey). Is monetary policy causing the rise in rents? In this post, we provide evidence that temporary increases in interest rates are ultimately associated with a decrease in rental prices that follows an initial, but relatively short lived, increase in rental prices and tenant demand. These results also hold across regions in England.

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Global R*

Ambrogio Cesa-Bianchi, Richard Harrison and Rana Sajedi

Recent increases in interest rates around the world, following a multi-decade decline, have intensified the debate on their long-run prospects. Are previous trends reversing or will rates revert to low values as current shocks subside? Answering this question requires assessing the underlying forces driving secular interest-rate trends. In a recent paper, we study the long-run drivers of the global trend interest rate – ‘Global R*’ – in the 70 years up to the pandemic. Global R* fell by more than three percentage points from its peak in the mid-1970s, driven by falling productivity growth and increased longevity. Our results suggest that without a reversal in these trends, or new forces emerging to offset them, long-run Global R* is likely to remain low.

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Supply chain disruptions: shocks, links, and hidden exposure

Rebecca Freeman, Richard Baldwin and Angelos Theodorakopoulos

Supply chain disruptions are routinely blamed for things ranging from elevated inflation to shortages of medical equipment in the pandemic. But how should exposure to foreign supply chains be measured? Using a global input-output database, this post shows that the full exposure of US manufacturing to foreign suppliers (especially China) is much larger than face value measures indicate. Moreover, it argues that the big change in supply chain disruptions in recent years stems from changes in the nature of the shocks (from idiosyncratic to systemic), not the nature of the supply chains.

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Why lower house prices could lead to higher mortgage rates

Fergus Cumming and Danny Walker

Bank Rate has risen by more than 5 percentage points in the UK over the past couple of years. This has led to much higher mortgage rates for many people. In this post we analyse another potential source of pressure on mortgagors: the potential for falls in house prices to push borrowers into higher – and therefore more expensive – loan to value (LTV) bands. In a scenario where house prices fall by 10% and high LTV spreads rise by 100 basis points, we estimate that an additional 350,000 mortgagors could be pushed above an LTV of 75%, which could increase their annual repayments by an extra £2,000 on average. This could have a material impact on the economy.

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