Don’t hold rates for too long – IMF

The International Monetary Fund (IMF) in its latest World Economic Outlook notes that different economies have experienced different effects from higher interest rates.

“In general, global growth has performed much better than economists expected at the start of the tightening cycle. This reflects a number of factors in the housing market, including the supply of housing and the level of household debt. Monetary policy has greater effects on activity incountries where the share of fixed-rate mortgages is low,” the Washington-based institution said.

In the UK, the proportion of mortgagors who are on fixed-rate mortgages in the UK has risen from under 30% in the early 2000s to around 85%.

“The longer time rates are kept high, the greater the likelihood that households will feel the pinch, even where they have so far been relatively sheltered”.

At the end of last year in the UK, around 45% of fixed-rate mortgage deals agreed pre-2021 were yet to renew. Although lower interest rates mean they will not face the same shock as those refinancing a year ago, they will still face a sizable jump in their mortgage costs.

“Over time, and as rates on these mortgages reset, monetary policy transmission could suddenly become more effective and so depressconsumption, especially where households are heavily indebted,” the IMF warned. (www.cityam.com)

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