Rigid Mortgage Rates and Monetary Policy Transmission

Abstract

During the 2019-2024 monetary easing cycle, Chinese households used their savings to prepay unprecedented amounts of mortgage loans. Mortgage rates remained rigid due to banks' market power and refinancing restrictions, while savings returns quickly adjusted to rate cuts. The widening gap between borrowing and savings returns encouraged deleveraging and reduced consumption. Exploiting loan-level data from a major bank, a quasi-natural policy experiment, and UnionPay's spending records, we provide household-and city-level evidence that larger positive gaps between mortgage rates and the benchmark rate drive greater prepayments and lower consumption. Our findings suggest that mortgage rate rigidity could make monetary easing counterproductive.

Keywords: Mortgage Prepayments, Monetary Policy Transmission, Household Consumption, Mortgage rate rigidity