The fourth issue that preoccupied Governing Council was elevated household debt and how that might affect the economy’s response to higher interest rates. We have enhanced our main macroeconomic model used for projections to capture relevant details around housing and debt, and we have re-estimated all of our model’s parameters using advanced methods. You can find details in the appendix in the MPR.
We do find that the economy is likely to respond more to higher interest rates at today’s debt levels than historically. Even so, we have to allow for the possibility that these improved estimates fall short of the mark. Furthermore, we have to watch how the household sector reacts to the new rules around mortgage underwriting.