Summary of Quarterly Bulletin
Summer 2004

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.

Assessing the stability of narrow money demand in the United Kingdom (179k)
(by Kathryn Grant, Gertjan Vlieghe and Andrew Brigden of the Bank's Monetary Assessment and Strategy Division).
It is widely accepted that the introduction of cash-saving technologies, such as credit and debit cards, and the growing network of automated teller machines (ATMs) contributed to a prolonged upward shift in narrow money velocity towards the end of the 20th century. This article considers whether this upward shift might plausibly have come to an end. First, it presents data on four distinct manifestations of financial innovation, and asks whether the pace of change in each might have slowed. Second, it uses time-series data stretching back more than 100 years to present estimates of the demand for narrow money during different time periods. It finds tentative evidence that, since the early 1990s, narrow money velocity has been a broadly stable function of the short-term rate of interest.

Deriving a market-based measure of interest rate expectations (181k)
(by Christopher Peacock of the Bank's Monetary Instruments and Markets Division).
Forward rates are perhaps the most common measure of expected future interest rates. But the existence of a risk premium can drive a wedge between forward rates and what the market expects future rates to be. In this article we use survey data to derive an estimate of the risk premium. We find that the survey-based risk premium implies a significant and time-varying difference between forward rates and expected future interest rates. Consequently, this article sets out a simple model of the survey-based risk premium that can be used to generate a path for expected future interest rates on any particular day.

The economics of retail banking-an empirical analysis of the UK market for personal current accounts
(97k)
(by Céline Gondat-Larralde and Erlend Nier of the Bank's Financial Industry and Regulation Division).
Understanding the economics of retail banking is important for the Bank of England in carrying out both its monetary stability and its financial stability function. In this article, we study the dynamics of the UK market for personal current accounts between 1996 and 2001. Analysing the evolution of banks' market shares and their pricing strategies, two questions are addressed: (i) Do bank market shares respond to price differentials? (ii) If not, why not? Our results point to customer switching costs as a key determinant of the nature of competition in the market for personal current accounts during the 1996 - 2001 period. They are thus broadly supportive of a number of initiatives that have since been undertaken to reduce such costs.

The financing of smaller quoted companies: a survey
(119k)
(by Peter Brierley and Mike Young of the Bank's Financial Stability Area).
This article summarises the results of a survey on the financing of smaller quoted companies (SQCs) conducted in February and March 2004 and builds on earlier work by the Bank and other organisations. It explores SQCs' recent and possible future use of external finance, their views on the availability of debt and equity finance and their views on possible constraints on such finance that are thought to be particularly relevant to SQCs. The results suggest that most SQCs are not currently experiencing any major difficulties in accessing either debt or equity finance.

Recent developments in surveys of exchange rate forecasts (105k)
(by Sally Harrison and Caroline Mogford of the Bank's Foreign Exchange Division).
Expectations of future exchange rates can influence moves in the current exchange rate. This article summarises recent developments in the mean forecasts for dollar/euro, dollar/sterling and sterling/euro bilateral exchange rates taken from the Reuters survey. The properties of these mean forecasts are evaluated and the article shows that they are not reliable predictors of future exchange rates.

Sterling money market funds (147k)
(by Adrian Hilton of the Bank's Sterling Markets Division).
Sterling institutional money market funds have, over the past five years, become an important feature of the sterling money market. This article looks at the characteristics of such funds and the instruments they invest in. It recognises that the growth of sterling institutional money market funds has the potential to change the flow of funds in the sterling money markets and to alter the composition of banks' balance sheets, but has no material implication for the implementation of monetary policy.