Quarterly Bulletin
Money Markets Articles
| 2008 Q2 | Recent advances in extracting policy-relevant information from market interest rates  (3.6mb) By Michael Joyce, Steffen Sorensen and Olaf Weeken of the Bank's Monetary Instruments and Markets Division. Market interest rates form an important part of the transmission mechanism of monetary policy. They also contain information about market expectations of future policy rates as well as attitudes to, and perceptions of, risk. Extracting and interpreting this policy-relevant information is not straightforward, however. This article describes recent advances in this field and how they can be used to shed light on the downward trend in long-term real forward interest rates and the upward trend in long-term inflation forward rates, both developments that have attracted the attention of policymakers. |
| Summer 2005 | Implementing monetary policy: reforms to the Bank of England’s operations in the money market |
| Summer 2004 | 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. 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. Reform of the Bank of England's operations in the sterling money markets. A consultative paper by the Bank of England
(455k)The Bank issued this paper for public consultation on 7 May 2004. It reviews the objectives and broad framework of the Bank of England's operations in the sterling money markets. Comments were invited by 11 June 2004. |
| Spring 2004 | The
relationship between the overnight interbank unsecured loan
market and the CHAPS Sterling system
(77k) (by Stephen Millard and Marco Polenghi of the Bank's Market Infrastructure Division). This article uses data on CHAPS Sterling transactions to describe the segment of the unsecured overnight loan market that settles within CHAPS. It assesses the size, timing and importance of these transactions for the underlying payments infrastructure. Advances and repayments of overnight loans are estimated to have accounted for around 20% of CHAPS Sterling activity by value over our sample period; four CHAPS Sterling members send and receive virtually all payments corresponding to these loans; and, finally, the value of CHAPS Sterling payments associated with this market rises towards the end of the CHAPS day. |
| Spring 2003 | Market-based
estimates of expected future UK output growth
(77k) (by Ben Martin and Michael Sawicki of the Bank's Monetary Instruments and Markets Division). This article derives some simple market-based projections of future output growth from a Taylor monetary policy rule, yield curves and inflation surveys. The results can be used as a timely cross-check on output growth expectations from other sources. We find that over the recent past the projections have been plausible in magnitude against both recorded outturns and survey expectations. |
| Winter 2002 | Money
market operations and volatility in UK money market rates
(160k) (by Anne Vila Wetherilt of the Bank's Monetary Instruments and Markets Division). The Bank of England implements UK monetary policy by influencing short-term interest rates in its money market operations. The way in which the Bank operates in the market has changed significantly over time, but the aim throughout has been to ensure that the behaviour of short-term interest rates is consistent with monetary policy decisions, whether made by the Chancellor of the Exchequer or, since 1997, by the Bank's own Monetary Policy Committee. Operational choices by the central bank, together with developments in the markets themselves, are likely to have affected the volatility of short-term interest rates. This article outlines various measures of volatility in sterling money markets. |
| Summer 2002 | The
Bank of England's operations in the sterling money markets
(70k) This article provides a full description of the Bank of England's arrangements for its money market operations. No changes to the operations are being announced at this time: the article updates the description provided in the May 1997 Quarterly Bulletin to take account of adaptations that have occurred over the past five years. |
| Spring 2002 | On
market-based measures of inflation expectations
(124k) (by Cedric Scholtes of the Bank's Reserves Management, Foreign Exchange Division). Prices of index-linked financial securities provide market-based measures of inflation expectations and attitudes to inflation risk. In the United Kingdom, 'breakeven' inflation rates derived from index-linked and conventional gilts reflect investors' forecasts of future inflation, and also act as a barometer of monetary policy credibility. Implied breakeven inflation rates are a useful alternative to surveys and econometric forecasts, and are regularly presented to the Bank's Monetary Policy Committee to inform its assessment of economic conditions. This paper outlines the technical and institutional factors that complicate the interpretation of UK breakeven inflation rates. Looking at data, we find that inflation expectations have fallen considerably since the adoption of inflation targeting and that UK monetary policy credibility is considerably stronger since the Bank of England was granted operational independence. Electronic trading in wholesale financial markets: its wider impact and policy issues
(75k)(by Helen Allen of the Bank's Market Infrastructure Division and John Hawkins of the Bank for International Settlements). Electronic trading is transforming financial markets. It can reduce costs, extend participation and remove many physical limitations on trading arrangements. It allows much greater volumes of trades to be handled, and permits customisation of processes that until recently would have been technically impossible or prohibitively expensive. It is a major force for changes in 'market architecture'-the key features of market structure such as participation arrangements, venues and trading protocols. These effects of electronic trading in turn have a real influence on the prices and quantities that result from the trading process. And they can also affect aspects of a market's 'quality'-its performance across attributes such as liquidity, trading costs, price efficiency and resilience to shocks. This matters because market quality has broader welfare implications-such as through the contribution of the efficiency of the financial system to economic growth and through the performance of markets and their resilience to financial instability. So the impact of electronic trading is of considerable interest to market participants and policy-makers alike. Many recent changes in securities market arrangements are closely associated with the effects of electronic trading (and wider technological innovation). Some market features that have lasted for years now seem to be changing. There are now choices to be made in market design in areas that were previously dictated by physical limitations. This article highlights some areas where electronic trading has had a particular impact on trading arrangements and discusses policy questions that arise. Analysts' earnings forecasts and equity valuations
(116k)(by Nikolaos Panigirtzoglou and Robert Scammell of the Bank's Monetary Instruments and Markets Division). Equity valuations are important for monetary policy makers as the factors that drive equity valuations may contain information about the future course of the economy. Moreover, a possible correction in equity prices may be a source of shocks to which monetary policy may have to react. Such an equity market correction may also have negative implications for financial stability. We use a three-stage dividend discount model to see whether analysts' forecasts can explain the level of equity prices over the past ten years. This model is also used to decompose equity returns into changes to earnings, the yield curve and equity risk premia. |
| Winter 2001 | The
Bank's contacts with the money, repo and stock lending markets
(45k) This article looks at the Bank's liaison with the London money markets and in particular at the work of the Sterling Money Markets Liaison Group and the Stock Lending and Repo Committee. |
| November 2000 | Inferring
market interest rate expectations from money market rates
Forward rates are the most commonly used measure of interest rate expectations. In principle, we want to derive forward rates that correspond to future two-week Bank repo rates. Unfortunately, however, there is no instrument that allows us to do this exactly. So we have to estimate forward rates from the sterling money market instruments that are actually traded. This article argues that first, forward rates estimated from money market instruments are biased estimates of expectations of future Bank repo rates because of term, credit and liquidity premia, as well as contract specification differences. And second, no particular money market instrument is likely to provide a 'best' indication of Bank repo rate expectations at all maturities. The spreads between the Bank's two-week repo rate and the instruments used to estimate our market curves are volatile and so we cannot expect to get a result that is common across all instruments. Reflecting these considerations, the Bank estimates two forward curves: one employing GC repo and gilt data and one that uses a combination of sterling money market instruments that settle on Libor rates. A number of simple ready-reckoner adjustments can be applied to the two estimated forward curves in an attempt to transform them into an estimate of a forward curve equivalent to two-week Bank repo rates. First, the GC repo/gilt forward curve needs to be adjusted up by around 15 basis points and the bank liability curve adjusted down by around 20 basis points. After these changes we still need to consider the impact of term premia effects. Preliminary estimates suggest that this would require us to make a further downward adjustment to both curves beyond a six-month horizon. However, we currently have limited information on the size of the term premia that create biases in forward curves even after we have taken into account estimates of credit and liquidity premia. |
