By Neil Cooper and Jim Steeley of the Bank’s Monetary Instruments and Markets Division.
In the previous edition of the Quarterly Bulletin, the authors described the method underpinning the Bank’s approach to estimating yield curves for the G7 countries. This article presents an economic application of these curves. It looks at estimated forward rate curves for pairs of countries, in order to assess the interest rate differentials that bond market participants expect to occur at different times in the future. Although the prospect of EMU may account for expected interest rate convergence among some of these countries, there are other factors that could also explain the observed interest rate differentials.
Expected interest rate convergence