Consumption effects of mortgage payment holidays during the Covid-19 pandemic

Alexandra Varadi and and Bruno Albuquerque

Mortgage payment holidays (PH) were introduced in March 2020 to help households who might have struggled to keep up with mortgage payments due to the pandemic. It allowed a suspension of mortgage principal and interest repayments for a maximum of six months, without affecting households’ credit risk scores. Given the novelty of the policy, we study in a new paper whether mortgage PH have supported household consumption during the pandemic, especially for those more financially vulnerable. Using transaction-level data, we find that temporary liquidity relief provided by PH allowed liquidity-constrained households to maintain higher annual consumption growth compared to those not eligible for the policy. We also find that PH led more financially stable households to increase their saving rates, not their consumption.

Continue reading →

Credit, crises and inequality

Jonathan Bridges, Georgina Green and Mark Joy

Any distributional effects on credit of macroprudential policies are only one part of the distributional story. Relatively little is known about how such policies affect the income distribution in the longer term via their role in preventing crises or mitigating their severity. Our paper helps to fill that gap in the literature by looking at the impact of past recessions and crises on inequality, and the amplifying roles of credit and capital within that. This helps to shed light on the distributional implications of not intervening – in the form of an amplified recession. We find that inequality rises following recessions and that rapid credit growth prior to recessions exacerbates that effect by around 40%.

Continue reading →

Citizens’ advice: lessons from the public

Kel Nwanuforo, Andrew Mills and Sharon Raj

The Citizens’ Panels (now the Citizens’ Forum) is a Bank of England discussion forum to engage with the UK public on important topics such as the labour and housing markets, or climate change. It included a forecasting competition, and Bank Underground invited the winners to contribute short pieces about how they evaluate the UK economy, discuss issues of their concern, and to propose solutions.

Part of Bank Underground’s purpose is to give a platform for views from Bank of England (‘Bank’) analysts that may differ from those of the Bank or its policy committees. Alternative views are encouraged within the Bank, but the range of opinions and ways of thinking by analysts is likely to be limited to some extent: by education, experience and less tangible factors such as the language analysts use to explain their thoughts. The Citizens’ Panels therefore offer a rich source of information. By now, they include some 3,200+ participants with a wide range of backgrounds: some are familiar with economics and central banking but many may know little about either. This blog represents the voices of some of those panel members about the UK economy, and how they addressed the forecasting challenge, which we put in front of participants as part of the Citizens’ Forum online community – which by-the-way is open to all.

Continue reading →

Predicting exchange rates

Robert Czech, Pasquale Della Corte, Shiyang Huang and Tianyu Wang

Can investors predict future foreign exchange (FX) rates? Many economists would say that this is an incredibly difficult task, given the weak link between exchange rate fluctuations and the state of an economy – a phenomenon also known as the ‘exchange rate disconnect puzzle’. In a recent paper, we show that some investors in the ‘FX option market’ are indeed able to accurately forecast exchange rate returns, particularly in periods with strong demand for the US dollar. These informed trades primarily take place on days with macroeconomic announcements and in options with higher embedded leverage. We also find that two groups of investors – hedge funds and real money investors – have superior skills in predicting exchange rates.

Continue reading →

Global supply chain risk and resilience

Rebecca Freeman and Richard Baldwin

Supply disruptions caused by systemic shocks such as Brexit, Covid and Russia-Ukraine tensions have catapulted the issue of risk in global supply chains to the top of policy agendas. In some sectors, however, there is a wedge between private and social risk appetite, or increased risks due to lack of supply chain visibility. This post discusses the types of risks to and from supply chains, and how supply chains have recovered from past shocks. It then proposes a risk-reward framework for thinking about when policy interventions are necessary.

Continue reading →

Remote working, bargaining power and productivity

Lena Anayi

Remote working soared during the Covid-19 (Covid) pandemic. Over half of British workers worked from home during the initial Covid lockdowns (first panel in Chart 1). And by February this year, nearly a third of workers were still doing so at least some of the time. But will this last? In this blog post, I explore firms’ and workers’ attitudes to remote working, the extent to which these may differ, and factors that might affect negotiations between them on future remote working arrangements.

Continue reading →

Financial concerns and the marginal propensity to consume

Georgina Green and Bruno Albuquerque

How would you respond to a one-off change in your income? For example, how would you react to someone handing you £500? Throughout the pandemic a large group of UK households were asked this hypothetical question in a survey. Households were also asked for other information, for instance about their debt, savings, and expectations for the future, giving us an opportunity to unpick their responses. We might expect households who are concerned about their financial future to be less eager to spend than others, preferring to save up for rainier days. In a new paper, we find the opposite result: concerned households would in fact spend around 20% more than others.

Continue reading →

Bitesize: Efficiently green? What a simple metric can tell us about banks’ exposure to energy price shocks and the transition to a green economy

Benjamin Guin

UK residential buildings account for about 15% of greenhouse gas emissions. To facilitate the transition to a low-carbon economy, the UK government aims to see many homes upgraded to an energy (EPC) rating of C or higher by 2035. Mortgage lenders are key in transitioning to more energy-efficient housing by financing purchases. This transition can be informed by a simple metric – like the portfolio share of mortgages for energy-efficient properties (with a rating of C or higher) relative to all outstanding mortgages, a variant of the Green Asset Ratio.

Continue reading →

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.

Continue reading →

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.

Continue reading →