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Inflation and mortgage repayments: the household expenditure channel

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  • Adhikari, Tamanna

    (Central Bank of Ireland)

Abstract

Ongoing inflationary conditions will reduce real incomes of those households whose wage growth is not in line with the increase in prices. In this Note, I measure the effect of general expenditure inflation on households’ mortgage repayment capacity. By defining a basket of essential items, I assess the availability of income after essential expenditure that remains to service mortgage payments, before and after an inflationary shock. The baseline and downside scenarios for 2022, in which inflation significantly exceeds nominal income growth, could lead to distress levels increasing by one-quarter to one-third respectively. Simulations show disproportionate increases in risk for lower-income, rural and older mortgage holders. Using supervisory data on Irish-domiciled non-public debt MMFs (i.e., LVNAVs and VNAVs), we provide robust graphical and econometric evidence indicating that MMFs voluntarily holding more Public-Debt Assets (PDAs) than required by MMF regulations, experienced lower outflows during the COVID-19 crisis. There is also evidence of resilience effects associated with having deposit buffers above requirements.

Suggested Citation

  • Adhikari, Tamanna, 2022. "Inflation and mortgage repayments: the household expenditure channel," Financial Stability Notes 6/FS/22, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:6/fs/22
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    References listed on IDEAS

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    Cited by:

    1. Adhikari, Tamanna & Carroll, James & Lambert, Derek, 2023. "An Estimate of Climate-Related Transition Risk in Irish Mortgage Lending," Financial Stability Notes 1/FS/23, Central Bank of Ireland.
    2. Hempell, Hannah S. & Silva, Fatima & Scalone, Valerio & Cornacchia, Wanda & Di Virgilio, Domenica & Palligkinis, Spyros & Velez, Anatoli Segura & Borkó, Tamás & Espic, Aurélien & Garcia, Salomón & Hei, 2024. "Implications of higher inflation and interest rates for macroprudential policy stance," Occasional Paper Series 358, European Central Bank.
    3. Adhikari, Tamanna & McGeever, Niall, 2023. "How resilient are Irish SMEs to input cost inflation?," Financial Stability Notes 6/FS/23, Central Bank of Ireland.
    4. Egan, Paul & Kenny, Eoin & O'Toole, Conor, 2023. "Interest rate snapback and the impacts on the Irish economy," Papers WP757, Economic and Social Research Institute (ESRI).
    5. Arrigoni, Simone & Boyd, Laura & McIndoe-Calder, Tara, 2022. "Household Economic Resilience," Quarterly Bulletin Articles, Central Bank of Ireland, pages 88-113, October.
    6. Morell, Joe & Shaw, Frances & Lyons, Paul & McCann, Fergal, 2022. "Rising interest rates and higher inflation: implications for the banking sector," Financial Stability Notes 15/FS/22, Central Bank of Ireland.

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