Can Central Banks Govern Mortgage Rates?

Mortgage rates play a significant role in the housing market and the overall economy. Central banks, as the monetary authorities of a country, have the ability to influence interest rates. This journal aims to explore whether central banks can effectively govern mortgage rates and the mechanisms through which they can exert influence.

Understanding Mortgage Rates

Mortgage rates refer to the interest rates charged on loans used to finance the purchase of real estate. These rates are influenced by various factors, including the cost of funds for lenders, market conditions, inflation expectations, and monetary policy decisions. Mortgage rates have a direct impact on the affordability of housing and can influence the demand for housing and the stability of the housing market.

Central Banks and Monetary Policy

Central banks have the responsibility of conducting monetary policy to achieve their objectives, such as price stability, full employment, and economic growth. They use various tools to influence interest rates, including the policy interest rate, open market operations, reserve requirements, and forward guidance. By adjusting these tools, central banks aim to control the overall level of interest rates in the economy.

Indirect Influence on Mortgage Rates

While central banks have the ability to influence interest rates, their direct control over mortgage rates is limited. Mortgage rates are influenced by the broader interest rate environment and market conditions. However, central banks can indirectly influence mortgage rates through the following channels:

Policy Interest Rate

Central banks set a policy interest rate, such as the benchmark interest rate or the overnight lending rate. Changes in the policy interest rate can have a cascading effect on other interest rates in the economy, including mortgage rates. When central banks lower the policy interest rate, it can lead to a decrease in borrowing costs for banks, which can then be passed on to borrowers in the form of lower mortgage rates.

Open Market Operations

Central banks conduct open market operations to buy or sell government securities in the open market. By buying securities, they inject liquidity into the banking system, which can lower short-term interest rates, including rates on interbank lending. This can indirectly affect mortgage rates, as interbank rates serve as benchmarks for longer-term borrowing costs.

Forward Guidance

Central banks provide forward guidance to communicate their future monetary policy intentions. This guidance can influence market expectations, including expectations about future interest rates. If central banks signal that they will maintain accommodative monetary policy for an extended period, it can put downward pressure on longer-term interest rates, including mortgage rates.

Macroprudential Policies

Central banks can also implement macroprudential policies to influence mortgage rates indirectly. These policies aim to promote financial stability and manage systemic risks in the housing market. For example, central banks can impose loan-to-value ratios or capital requirements on mortgage lending institutions. Such measures can affect the availability and cost of mortgage credit, which in turn can influence mortgage rates.

Limitations and Challenges

While central banks can exert influence on mortgage rates, several limitations and challenges exist:

Transmission Mechanisms

The transmission of central bank policies to mortgage rates is not always direct or immediate. The effectiveness of monetary policy in influencing mortgage rates depends on the structure of the financial system, the behavior of lenders, and the responsiveness of borrowers. Transmission lags can occur, and other factors in the economy, such as fiscal policy or global economic conditions, can also influence mortgage rates.

Market Forces

Mortgage rates are influenced by market forces, including supply and demand dynamics, investor preferences, and risk perceptions. These factors can sometimes override the impact of central bank policies. Market expectations, inflationary pressures, and changes in the overall economic outlook can also influence mortgage rates independently of central bank actions.

Global Influences

Mortgage rates can be influenced by global factors, such as international capital flows, exchange rate movements, and global interest rate trends. Central banks may have limited control over these factors, as they are influenced by global economic conditions and the actions of other central banks. Global factors can sometimes overshadow the influence of domestic monetary policy on mortgage rates.

Regulatory and Institutional Factors

Regulatory and institutional factors can also impact mortgage rates. For example, the structure of the mortgage market, the presence of government-sponsored entities, and regulatory requirements can affect the pricing and availability of mortgage credit. Central banks may have limited control over these factors, as they fall under the purview of other regulatory authorities or government entities.


While central banks have the ability to influence interest rates, their direct control over mortgage rates is limited. Central banks can indirectly influence mortgage rates through their monetary policy decisions, including changes in the policy interest rate, open market operations, forward guidance, and macroprudential policies. However, the transmission of central bank policies to mortgage rates is subject to various limitations and challenges, including transmission lags, market forces, global influences, and regulatory factors. It is important to recognize that mortgage rates are influenced by a complex interplay of factors, and central banks’ ability to govern mortgage rates is constrained by these dynamics.