Inferring market interest rate expectations from money market rates

Quarterly Bulletin 2000 Q4
Published on 01 December 2000

By Martin Brooke of the Bank’s Gilt-edged and Money Markets Division, and Neil Cooper and Cedric Scholtes of the Bank’s Monetary Instruments and Markets Division.

The Bank’s Monetary Policy Committee is interested in market expectations of future interest rates. Short-term interest rate expectations can be inferred from a wide range of money market instruments. But the existence of term premia and differences in the credit quality, maturity, liquidity and contract specifications of alternative instruments means that we have to be careful when interpreting derived forward rates as indicators of the Bank’s repo rate. This article discusses the differences between some of the available instruments and relates these to the interest rate expectations that are calculated from them. It also describes the Bank’s current approach to inferring rate expectations from these instruments.

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