By Richhild Moessner of the Bank’s Gilt-edged and Money Markets Division.
The Bank of England’s Monetary Policy Committee uses market expectations of future interest rates to inform its policy decisions. Interest rate expectations can be inferred from a range of financial instruments, including interest rate options. This article surveys the structure and use of the over-the-counter (OTC) interest rate option market. It discusses what information OTC interest rate options may contain about market interest rate expectations, additional to that available from products traded on exchanges. It also considers the linkages between OTC interest rate option markets and the markets in the underlying assets.