By Mark Deacon and Andrew Derry.
Market expectations of interest rates and inflation can give important insights into the credibility of monetary policy. For that reason, the Bank has carried out extensive research over the past two years into the ways in which inferences about these expectations can be drawn from the market prices of government bonds. The preliminary results of this work were discussed at a one-day conference in March organised by the Bank, in which researchers in the field from other central banks and a number of academics took part. Their comments—and the results of further research in the Bank—are reflected in this article. The article explains the important issues of estimation and interpretation which arise in this work, and outlines possible changes to the techniques the Bank uses in its analysis of market expectations—for example, in its Inflation Report. Comments on the issues raised and on the methodological changes proposed will be most welcome.