The heterogenous transmission of monetary policy to household credit

Prepared by Dorian Henricot, Johannes Pöschl and Athanasios Tsiortas

The ECB’s monetary policy decisions affect loans to households, but in different ways depending on household characteristics and the type of loan. The effect of interest rate changes on a household’s decision to apply for a loan and a lender’s decision to grant a loan depends on various household characteristics. Data from the ECB Consumer Expectations Survey on credit access perceptions, loan applications and loan rejections reveal the differences in how monetary policy passes through to household credit.^[1]

Households perceived a tightening in credit access when interest rates rose but an improvement in access when interest rates fell, with higher-income households reporting the most noticeable easing (Chart A). Overall, the net percentage of households that perceived credit access to have become more difficult over the past 12 months increased during the tightening period (January 2022 to May 2024) and decreased during the easing period (June 2024 to August 2025). The net percentage of lower-income households that reported a tightening of credit access was more elevated than that of higher-income households throughout the sample period. From June 2024 to August 2025, this net percentage approached a neutral level for higher-income households, whereas it remained elevated for those on lower incomes.

Chart A

Changes in households’ perceived credit access over the past 12 months by income quintile

(percentages of consumers)

Loan applications developed heterogeneously depending on the type of household and type of loan.^[2] In lower-income households, applications for consumer loans began to increase in 2022, alongside the tightening of monetary policy, and they continued to rise after the first interest rate cut in 2024 (Chart B, panel a). For households in the highest income quintile, applications for mortgage loans fell markedly over the tightening period and also during the subsequent easing period (Chart B, panel b). However, relative to their usual volatility, there was little change in mortgage loan applications submitted by lower-income households or in consumer loan applications submitted by higher-income households.

Chart B

Loan application, acceptance and take-up rates over time by income group

a) Consumer loans

(percentages of consumers)

b) Mortgage loans

(percentages of consumers)

Loan acceptance rates also developed heterogeneously over the monetary policy cycle. For lower-income households, there was a substantial drop in consumer loan acceptance rates (red diamonds in Chart B, panel a), whereas mortgage loan acceptance rates (red diamonds in Chart B, panel b) remained broadly flat at substantially lower levels compared with higher-income households. For higher-income households, acceptance rates for consumer loans decreased only marginally, whereas mortgage loan acceptance rates fell during the tightening period but increased during the easing period.

Offsetting dynamics for loan applications and their acceptance rates give a mixed picture of the overall proxy for consumer loan take-up. Consumer loan take-up (yellow dashed lines in Chart B, panel a) grew for lower-income households and remained broadly flat for higher-income households.^[3] Meanwhile, mortgage loan take-up (yellow dashed lines in Chart B, panel b) remained broadly unchanged for lower-income households but declined significantly for higher-income households.

Varying exposure to liquidity constraints and levels of financial literacy could explain these different loan dynamics. Lower-income households may have had to borrow more to pay for basic necessities over the tightening period, with adverse macroeconomic shocks increasing their liquidity constraints.^[4] Consistent with this explanation, their consumer loan applications went up. The decline in acceptance rates for consumer loans also suggests that the increase in these loan applications came from riskier borrowers. Meanwhile, higher-income households, which are less exposed to liquidity constraints, reduced both their mortgage and consumer loan applications as interest rates increased. In addition to higher exposure to liquidity constraints, the propensity of lower-income households to consider whether it is a good time to borrow seems to be less dependent on the financial conditions, potentially on account of lower levels of financial literacy.^[5] Overall, these factors could explain why lower-income households, unlike higher-income ones, did not reduce their demand for mortgage loans during the tightening period.

In the initial phase of interest rate hikes, there was an increase in the take-up of adjustable-rate mortgage loans, particularly among lower-income households. Zooming in on mortgage loan heterogeneity, the share of adjustable-rate mortgage (ARM) loans rose between April and December 2022 (Chart C, panel a), and subsequently declined. Complementary data from the ECB Consumer Expectations Survey show that demand for ARM loans was more concentrated among lower-income households (Chart C, panel b). The difference between long-term and short-term borrowing rates is an important driver of households’ choice between fixed-rate mortgages and ARMs, particularly for households with borrowing constraints.^[6] This may have triggered the increased take-up of ARM loans in 2022, when long-term rates started rising in anticipation of policy rate hikes. The continued relatively high (albeit declining) share of ARM loans up to mid-2024, despite short-term interest rates rising above long-term rates, suggests that banks also increased their supply of ARM loans. For example, Foà et al. (2019) show that banks affected by negative funding shocks are more likely to increase their supply of ARM loans, in particular to households that are less financially sophisticated.^[7]

Chart C

Share of adjustable-rate mortgage loans in new loans

a) Aggregated

(percentage points)

b) By income quintile

(percentages)

In conclusion, household credit developed heterogeneously over the recent monetary policy cycle. Survey responses indicate that lower-income households did not reduce their mortgage loan applications, unlike their higher-income counterparts, and that they even increased their consumer loan applications, as monetary policy tightened. Despite offsetting loan supply dynamics, lower-income households did not reduce their loan take-up, while increasing their share of ARM loans, at a time when borrowing conditions were less favourable.

References

Albertazzi, U., Fringuellotti, F. and Ongena, S. (2024), “Fixed rate versus adjustable rate mortgages: Evidence from euro area banks”, European Economic Review, Vol. 161, January.

Bobasu, A., Charalambakis, E. and Kouvavas, O. (2024), “How have households adjusted their spending and saving behaviour to cope with high inflation?”, Economic Bulletin, Issue 2, ECB.

Charalambakis, E., Kouvavas, O. and Neves, P. (2024), “Rate hikes: How financial knowledge affects people’s reactions”, The ECB Blog, ECB, 15 August.

Dausà i Noguera, N., Kocharkov, G. and Kouvavas, O. (2025), “The 2021-23 high inflation episode and inequality: insights from the Consumer Expectations Survey”, Economic Bulletin, Issue 7, ECB.

Foà, G., Gambacorta, L., Guiso, L. and Mistrulli, P.E. (2019), “The Supply Side of Household Finance”, Review of Financial Studies, Vol. 32, No 10, October, pp. 3762–3798.