The Transmission of Monetary Policy Again Depends on Household Reaction

Irish reminder raised refinancing 76 percent, but inattention persists
Euro-area consumers attend far less to rates than inflation
HARP's slow uptake shows an older transmission failure

In a field experiment with 12,050 variable-rate borrowers in Ireland, the refinancing reminder increased the internal refinancing rate from 8.9 percent to 15.7 percent, a 76 percent increase over the control group. The finding, published in a joint study by the Central Bank of Ireland, Trinity College Dublin and MIT researchers, was presented as evidence that household attention is a critical obstacle to the transmission of monetary policy. The finding is real and useful. But it is not new as a pattern. Historically, every time a central bank moves the policy rate, the effect on the real economy goes through a stage that is little controlled by policymakers themselves i.e., the behavior of households that are called upon to react to it.

The Last-Mile Problem Is Not New

In the experiment by Byrne, Devine, King, McCarthy and Palmer, borrowers were randomly divided into one control group that received the standard mandatory update on cheaper products from their existing lender and six groups that received behaviorally enhanced versions of the same update. Within each group, half of the borrowers received an additional short reminder four to six weeks later. The average interest rate on the loans under consideration was 4.2 percent, while the available fixed rate through refinancing reached 2.9 percent, with an average expected savings of about €1,000 in the first year. The reconfiguration of the update without a reminder increased refinancing by 1.8 percentage points. The addition of the reminder added another 3.6 percentage points.

This finding is part of a long series of studies that had already recorded the same problem in different markets. Harvard research had described this in 2006. a widely cited U.S. study documented the same "refinancing failure" in 2016 the "refinancing failure" in a sample of U.S. borrowers who left significant amounts of savings on the table a Danish study confirmed the same pattern in 2020 confirmed the same pattern in Denmark in 2020, while similar findings were recorded in the United Kingdom, Italy, Australia and Ireland. In the Irish market itself, Central Bank of Ireland research had already shown in 2020 that three out of five Irish mortgages could save more than €1,000 within a year of refinancing, but only 2.9 percent of loans changed lenders in the second half of 2019.

Consumer Attention to Interest Rates Remains Limited

The European Central Bank's Consumer Expectations Survey offers a complementary picture of the same phenomenon at the European level. European Central Bank survey research recorded in December 2023, after the euro area key interest rates rose by 4.5 percentage points in two years, that less than one in four consumers said they were paying "too much" or "too little" attention to interest rates. This attention was significantly lower than the attention shown by the same consumers to inflation, which stood at 5.2 percent in August 2023. The asymmetry is not accidental, as price changes are perceived directly through daily purchases, while interest rate changes remain less visible to the majority of households.

The same survey found significant heterogeneity among consumers. 43 percent of variable-rate mortgage holders said they were very attentive to interest rates, compared to 26 percent of those with a fixed interest rate, 22 percent of those with no mortgage at all and just 19 percent of tenants. The share of more financially literate households who considered it a good time to borrow fell from over 30 percent at the beginning of the tightening cycle to about 10 percent later, while less literate households adjusted their estimate much more slowly. The link between financial literacy and attention to interest rates shows that the speed and homogeneity of monetary policy transmission depend on factors that are not at all related to the interest rate itself.

A Decade-Old Precedent in the U.S. Mortgage Market

The American experience after the 2008 crisis offers yet another historical example of the same problem, albeit with a different cause. The Home Affordable Refinance Program was designed in 2009 by the Federal Housing Finance Agency to allow borrowers with mortgages guaranteed by Fannie Mae and Freddie Mac to refinance even when their property value had fallen below the loan balance. The original goal of the service was to involve four to five million borrowers. By September 2011, fewer than one million had refinanced through the program.

The underperformance was mainly due to structural barriers rather than inactivity, as the program excluded borrowers with a loan-to-property value ratio above 125 percent and had a very short duration. When these restrictions were lifted in October 2011 with the program's redesign, known as HARP 2.0, participation increased sharply. According to a report by the Federal Housing Finance Agency for the third quarter of 2013, the total number of refinances through the program had reached 3.2 million since its inception, with the 2012 volume alone approaching the sum of the previous three years. The example shows that the transmission of monetary policy can be blocked by both institutional constraints and simple inaction and that both mechanisms have been repeatedly recorded in different countries and decades.

What Repetition Means for Monetary Policy Transmission Today

The European Central Bank cut its interest rates gradually over 2024 and 2025, before reversing course with an increase in June 2026 due to rising energy prices. Each such shift reignites the question of how much of the change ultimately reaches household balance sheets. In the U.S. mortgage market, interest rates on new loans follow changes in the base rate relatively closely, while interest rates on the existing stock of loans adjust much more slowly and with a significant delay. This asymmetry means that the effectiveness of a rate cut depends less on the reduction itself and more on whether borrowers act on it.

The conclusion of Byrne, Devine, King, McCarthy and Palmer is that communication can strengthen the refinancing channel at low cost, but this tool is not the exclusive prerogative of central banks. Fiscal authorities seeking to stimulate consumption, competition authorities monitoring the mortgage market and consumer protection authorities dealing with debt servicing burdens could equally leverage this. Trust in the sender appears to play a key role, as a communication from a public body or central bank is expected to have more influence than a counterpart from a for-profit lender.

The Limits of Communication as a Policy Tool

Even in the best group of the Irish experiment, the internal refinancing rate reached only 15.7 percent. This means that more than four out of five eligible borrowers remained inactive despite the personalised information and reminders. This observation does not negate the usefulness of communication, but places it within realistic limits. The authors themselves note that the intervention operated in a bearish interest rate environment with widely available refinancing opportunities and that the effectiveness of a single reminder may be reduced if repeated frequently or applied in a rising interest rate environment.

The history of the HARP program shows something similar from a different perspective, as there was a need for a change in the eligibility rules themselves and not just better communication to unlock participation. The question that arises from the comparison of the two cases is not whether households react to changes in interest rates, but under what conditions they react each time, an answer that the literature of the last twenty years has only partially given.

Household inaction in the face of favourable interest-rate changes is not a 2026 discovery. The same pattern had already been documented across household finance and mortgage markets in the United States and Denmark over the previous two decades, while HARP revealed a similar problem in practice after the financial crisis. The Irish experiment adds something new by separating the effect of disclosure design from the effect of a reminder, but it does not change the basic picture. Monetary policy transmission remains as dependent on household behaviour as on the interest rate itself and the last mile remains the most difficult part of the journey.

This article reflects the analytical judgment of The Economy Editorial Board and does not constitute policy advice or the official position of any affiliated institution.

References

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Byrne, S., Devine, K. and McCarthy, Y. (2020) Room to Improve: A Review of Switching Activity in the Irish Mortgage Market. Dublin: Central Bank of Ireland, Economic Letters 12/EL/20.
Byrne, S., Devine, K., King, M., McCarthy, Y. and Palmer, C. (2025) 'The last mile of monetary policy: Inattention, reminders, and the refinancing channel', Journal of Finance, forthcoming.
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