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Home > News and Publications > Summary of Quarterly Bulletin 2010 Q3

Summary of Quarterly Bulletin 2010 Q3

20 September 2010


Each article is available as a separate pdf file; click on the appropriate title to access the relevant file. Alternatively you may download the complete issue (634k).

Recent economic and financial developments
Markets and operations (198k)
This article reviews developments in sterling financial markets, including the Bank’s official operations, since the 2010 Q2 Quarterly Bulletin up to 27 August 2010. The article also summarises market intelligence on selected topical issues relating to market functioning.

Research and analysis
Research work published by the Bank is intended to contribute to debate, and does not necessarily reflect the views of the Bank or of MPC members.

Understanding the price of new lending to households (114k)
By Richard Button of the Bank’s Financial Institutions Division and Silvia Pezzini and
Neil Rossiter of the Bank’s Monetary Assessment and Strategy Division.
During the recent financial crisis Bank Rate was reduced sharply, but in general the interest rates charged on new lending to households did not fall by as much and indeed some interest rates rose. This article assesses the factors that have influenced new lending rates using a simple decomposition of new lending rates into lenders’ funding costs, credit risk charges and a residual (which includes both operating costs and the mark-up). Applying the decomposition to two indicative lending products suggests that funding costs have been an important driver of new lending rates and the residual has also risen. The residual needs to be interpreted with caution — by definition it reflects all the remaining unmodelled factors. But among other things, a larger residual is consistent with lenders increasing mark-ups over marginal costs for new lending, which may reflect a need to build higher capital levels within the banking sector.

Interpreting the world trade collapse (75k)
By Silvia Domit and Tamarah Shakir of the Bank’s International Economic Analysis Division.
World trade’s dramatic collapse from the end of 2008 was emblematic of a globally synchronised recession that threatened to become a depression and of a financial crisis painfully transmitted to the real economy. The extent of the fall in world trade relative to that in world GDP and the subsequent strength of the trade recovery so far suggests particular factors have been affecting global trade flows. This article considers the possible reasons for the pronounced fall and recovery in world trade relative to world GDP, focusing on UK export demand. At its core, the extraordinary decline in trade stemmed from the combination of a shock to global demand skewed towards highly tradable sectors and the ever-more globalised production process for these goods. The encouraging improvement in world trade from the second half of 2009 can also be attributed to some of these factors, as well as suggesting that permanent damage to the global marketplace may be less extensive than first feared.

What can we learn from surveys of business expectations? (92k)
By Tracy Wheeler of the Bank’s Conjunctural Assessment and Projections Division.
The recent financial crisis was accompanied by an unprecedented deterioration in businesses’ expectations for future economic activity. This article examines the strength of the signal that measures of these expectations have provided for output growth in the past. Recessions have typically been preceded by large declines in surveys of business expectations. But these measures have, on occasions, given false signals of recessions, falling sharply with little discernable response in economic activity. And small movements in these survey measures tend to contain little information. The article considers techniques that may help to distinguish whether large declines in measured expectations are meaningful or not. But it concludes that this must ultimately be left to judgement. Consequently, while measures of business expectations are useful economic indicators, they must be interpreted with care.

Residential property auction prices (66k)
By Matthew Corder of the Bank’s Monetary Policy Unit and Kate Reinold of the Bank’s Structural Economic Analysis Division.
Large movements in house prices over the past three years have re-emphasised the challenge of analysing their movements. This article presents data on properties sold at auction that may offer insights into short-term dynamics in the housing market.

Chief Economists’ Workshop:  state-of-the-art modelling for central banks (52k)
By Andy Blake and Céline Gondat-Larralde of the Bank’s Centre for Central Banking Studies.
Since 2004 the Bank’s Centre for Central Banking Studies has organised an annual Chief Economists’ Workshop to provide a forum for leading central bank practitioners and academic thinkers to exchange views. The recent financial crisis has put many aspects of central banks’ activities under the spotlight, and this year’s Workshop offered a critical appraisal of the economic modelling frameworks used by central banks. Efforts are under way to build upon advances in research and improve those frameworks. But, at the same time, economists will need to remain humble about the inevitable limitations of their models, which will continue to be just one of many inputs to the policymaking process.

Monetary Policy Roundtable (38k)
On 14 July, the Bank of England and the Centre for Economic Policy Research hosted the fourth Monetary Policy Roundtable. These events are intended to provide a forum for economists to discuss key issues affecting the design and operation of monetary policy in the United Kingdom. As always, participants included a range of economists from private sector financial institutions, academia and public sector bodies.  At this fourth Roundtable there were four discussion topics: what have we learnt about inflation dynamics? quantifying the effects of quantitative easing; global prospects and the impact on the UK economy; and monetary and fiscal policy.

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