Why Central Bank Rate Decisions Hit Your Mortgage Months Later

A central bank announces a rate change and the news treats it as an event that happened today. For your household, it is closer to a weather forecast for next season.

The transmission lag, explained

Economists estimate that a change in the policy rate takes roughly twelve to eighteen months to have its full effect on inflation and household spending. The reason is that the rate does not touch you directly. It touches the price at which banks lend to each other, which touches the price at which they lend to you, which touches your payments only when your deal changes.

The chain looks like this.

1. The central bank moves the policy rate.
2. Money-market and swap rates reprice, often within hours, sometimes before the announcement because markets anticipated it.
3. Banks reprice new fixed-rate mortgage products within days or weeks.
4. Tracker and variable mortgages move at the next billing cycle.
5. Existing fixed-rate borrowers feel nothing until their deal expires, which could be years away.
6. Spending slows, then hiring slows, then inflation responds.

What this means for a fixed-rate borrower

If you are on a fix, the only date that matters to you is the expiry date, not the announcement date.

• Find your expiry date and put it in the calendar with a six-month warning. Most lenders let you lock a new deal three to six months ahead.
• Locking early is usually a free option. If rates fall before completion, most lenders let you switch to the better product. Check that clause specifically.
• Model the payment, not the rate. Take your outstanding balance and remaining term, and calculate the payment at the current market rate. That number, not a percentage, tells you whether the household budget survives it.

Fix or float

There is no universally right answer, but the decision becomes clearer with three questions.

1. Can the budget absorb a payment rise? If a two-point rise would break the household, buy certainty and fix, even at a slightly worse rate. You are purchasing predictability, which has real value.
2. How long until you might move or repay early? Long fixes carry early repayment charges. A five-year fix on a house you will leave in two years can be expensive.
3. What is already priced in? Fixed rates are built from market expectations of future policy rates. If the market already expects cuts, those expected cuts are largely in the price of the fix on offer today. You are not being clever by waiting for what everyone already knows.

The signal worth watching

Ignore the day's headline. Watch the direction of the two-year and five-year swap rates, which are the raw material of fixed mortgage pricing. When those trend down for several weeks, fixed deals follow. When they spike, deals get pulled fast, sometimes with only hours of notice.