Differences in the attention that households pay to economic news may offer important insights for the business cycle and the propagation of economic shocks. This column uses responses from the ECB’s Consumer Expectations Survey to show that in a high-inflation, high-interest-rate environment, consumers pay much more attention to price developments than to interest rates. The authors also find evidence of varying levels of attention to interest rates across consumers, with holders of adjustable-rate mortgages as well as more financially literate consumers significantly more attentive to interest rate developments. These differences may have implications for both the speed and the heterogeneity of monetary transmission to euro area households.
Recent research has emphasised the importance of consumers’ and firms’ attention to economic developments and news because variation in this attention may offer important insights for the business cycle and the propagation of economic shocks (e.g. Weber et al. 2024, Link et al. 2024). In a recent large-scale metanalysis study, Weber et al. (2024) use several survey experiments across different countries and different time periods to demonstrate that both household and firm attention to news about inflation tends to be higher in high-inflation periods. Conversely, when inflation is low, the evidence strongly suggests that consumers pay only limited attention to public information about prices.
In this column, we draw on data from the ECB’s Consumer Expectations Survey (CES; see Georgarakos and Kenny 2022 and Bańkowska et al. 2021) to shed new light on the role of attention consumers pay to interest rates. We focus on the potential importance of attention to interest rates for understanding the transmission of monetary policy to households and report evidence that varying levels of such attention may have implications for both the speed of monetary transmission and its likely heterogeneous effects across different euro area households. In addition, attention to interest rates closely linked to consumers’ overall levels of financial literacy (Lusardi and Mitchell 2011, 2023). Building on this insight, we argue that policy measures that help to improve financial literacy are also likely to raise attention to interest rates and thereby improve the overall effectiveness of monetary policy transmission.
Consumers pay much less attention to interest rates than to inflation
In the CES, we elicited the attention that consumers pay to interest rate by asking them the following question in December 2023:
“Thinking about yourself, how much attention do you currently pay to interest rates in the country you currently live in?”
Answers were provided on a five-point scale ranging from “almost no attention” to “a great deal of attention”. It is important to note that these data on attention to interest rates was collected after the significant increase in monetary policy rates in the euro area by 4.5% over the course of 2022 and 2023. Moreover, respondents to the CES were also asked a counterpart question about their attention to inflation a few waves earlier in August 2023, when euro area inflation stood at 5.2%. In the CES the concept of inflation refers to “changes in prices in general” to ensure that is well understood by all survey participants.
Figure 1 Attention to inflation and interest rates
Percentage of consumers, by degree of attention
Source: ECB Consumer Expectations Survey (CES).
Notes: Weighted estimates. In August and December 2023 respectively consumers were asked on an experimental basis: “Thinking about yourself, how much attention do you currently pay to (changes in prices in general/interest rates) in the country you currently live in?”. The ordering of response options was randomly inverted for 50% of the sample but no significant ordering effects (priming of responses) were observed for either of the two questions.
Despite the significant change in the stance of monetary policy, consumers’ reported attention to interest rates in December 2023 appears to have been quite modest overall. For example, fewer than one in four euro area consumers reported that they were paying “much” or “a great deal of” attention to interest rates. The level of consumers’ attention to interest rates is also considerably lower than the attention consumers pay to inflation (see Figure 1). One potential reason for this is the higher salience of inflation developments for consumers relative to interest rate changes. The vast majority of consumers experience and observe changes in the prices of goods and services directly through their shopping and other daily activities (D’Acunto et al. 2024). In contrast, fewer consumers may observe interest rate developments directly in their daily activities, and they may therefore be less likely to notice rate changes. As we explore further below, the chance that consumers will pay attention to interest rate changes may in turn depend on their own personal or household characteristics, including, for example, their understanding of financial concepts or the scale and type of their borrowing activities they are involved in (for example, whether or not they hold an adjustable-rate mortgage).
Given consumers’ overall relatively modest attention to interest rates, it follows that many consumers may only imperfectly incorporate changes in borrowing and saving rates into their decision making. This also suggests the potential of delayed contractionary effects of monetary policy at current interest rate levels. For example, consumers seeking new credit in the future would likely become more aware of prevailing interest costs and, as a result, they might adjust their interest rate expectations and consumption more significantly (e.g. Weber et al. 2024, Schnorpfeil et al. 2023).
Significant variation across consumers in attention to interest rates
The attention of consumers to interest rates has also been heterogeneous across the euro area and appears closely linked to their housing situation as well as their level of financial literacy. Consistent with an important role of housing in monetary transmission to households, consumers most exposed to interest rate changes, such as holders of adjustable-rate mortgage, pay more attention to interest rate developments. For example, 43% of consumers with an adjustable-rate mortgage indicated in December 2023 that they were paying “much” or “a great deal of” attention to interest rates. In contrast, only 26% of consumers with a fixed-rate mortgage, 22% of consumers without a mortgage, and 19% of renters indicated a similarly high level of attention.
Figure 2 Factors associated with attention to interest rates
Marginal effects from a linear probability model, i.e. 0.05 corresponds to a 5% increase in attention
Source: ECB Consumer Expectations Survey (CES).
Notes: The Figure shows marginal effects of a linear probability model where the dependent variable is one if a consumer pays much or a great deal of attention to interest rate developments. The regression includes country dummies and additional control variables for household size, employment and liquidity constraints (not reported). 95-% confidence intervals based on robust standard errors are shown. Household income is elicited at the survey entry and respondents are classified in quartiles from Q1 to Q4 on the country level. Base levels are: for age 18-34 years old, men, first income quintile, primary or secondary education, low financial literacy.
Also, according to more formal empirical analysis as depicted in Figure 2, female, lower-income, and less financially literate consumers are typically much less attentive to interest rates compared to their male, higher-income, or more financially literate counterparts. In this analysis, financial literacy is measured using the standardised set of questions from Lusardi and Mitchel (2011). The so-called ‘big 3’ questions capture understanding of compound interest, the effect of inflation on real returns, and portfolio diversification. Respondents are classified as having high (low) financial literacy if they answer (do not answer) all three questions correctly, which facilitates an almost equal sample split across the CES. Previous research shows that financial literacy has important consequences for consumers’ ability to manage their finances and secure sufficient resources for their retirement (Lusardi and Mitchell 2023). Our evidence also suggests that financial literacy could impact the monetary transmission by influencing the attention that consumers pay to interest rate changes.
Stronger portfolio responses of attentive and more financially literate consumers
Consistent with the greater attention to interest rates among more financially literate consumers, a larger share of financially literate households tends to assess a higher interest rate environment as a good time to save (see Figure 3), in line with standard models of monetary policy transmission. Conversely, the share of financially literate households indicating that it is a good time to borrow dropped from above 30% at the start of the policy tightening cycle to about 10% more recently (see Figure 4). Less financially literate households (who often belong to the lower part of the income distribution) displayed at the same time a much slower adjustment in their assessment of saving and borrowing conditions. Such divergences suggest that policies aimed at improving the overall level of financial literacy in the population may also help to make monetary policy transmission more effective by encouraging a more active rebalancing of household portfolios.
Figure 3 Consumers perceiving it a good time to save
Percentage of consumers, by degree of financial literacy (left) and main ECB refinancing rate (right)
Source: ECB (ECB interest rates) and ECB Consumer Expectations Survey (CES), latest observation: Apr. 24.
Notes: Weighted estimates. Each month, consumers are asked: “Generally speaking, do you think now is a good time or a bad time to save money in savings accounts?” on a 5-point scale ranging from “very bad” to “very good”. The chart depicts the percentage of consumers answering it is a “good” or “very good” time to save money. The CES elicits financial literacy by asking three questions on consumers understanding of interest rate compounding, nominal vs. real values and portfolio risk diversification. The ECB policy rate plotted (rhs) is the interest rate for main refinancing operations (fixed rate tenders).
Figure 4 Attitudes to borrowing money
Percentage of consumers, by degree of financial literacy (left) and main ECB refinancing rate (right)
Source: ECB (ECB interest rates) and ECB Consumer Expectations Survey (CES), latest observation: Apr. 24.
Notes: Weighted estimates. Each month, the CES asks respondents: “Generally speaking, do you think now is a good time or a bad time to borrow money from a bank?” on a 5-point scale ranging from “very bad” to “very good”. The chart depicts the percentage of consumers answering it is a “good” or “very good” time to borrow money from a bank. The CES elicits financial literacy by asking three questions on consumers understanding of interest rate compounding, nominal vs. real values and portfolio risk diversification. The ECB policy rate plotted (rhs) is the interest rate for main refinancing operations (fixed rate tenders).
Implications
In this column we draw on data from the ECB’s Consumer Expectations Survey to shed new light on the role of varying levels of attention – specifically, attention to interest rates – in understanding monetary transmission to euro area consumers. First, we show evidence that in a high-inflation, high-interest rate environment, consumers pay much more attention to price developments than to interest rates. We also find evidence of varying levels of attention to interest rates across consumers, with consumers with an adjustable-rate mortgage as well as more financially literate consumers significantly more attentive to interest rate developments. These differences may have implications for both the speed and the heterogeneity of monetary transmission to euro area households. Overall, policies that help to improve financial literacy may also turn out to improve the overall effectiveness of monetary policy.
Source : VOXeu
