The Mortgage Debt Channel of Monetary Policy when Mortgages are Liquid

We examine what is widely considered to be one of the strongest channels of monetary policy transmission into household spending – the effect of changes in mortgage payments when mortgage rates are linked to the short-term policy rate. Using bank transactions data from Australia, we analyze a cumulative 425 basis point increase in the central bank policy rate, which caused mortgage repayments for homeowners with adjustable-rate mortgages to increase by $13,800. We find little change in the spending of adjustable-rate mortgagors relative to fixed-rate mortgagors. This is because adjustable-rate mortgages come with redraw facilities that make mortgages liquid, and households had large excess buffers due to pandemic-era transfer programs and restrictions on spending. Our findings demonstrate that the direct effects of a monetary policy tightening on household spending need not be large.