Working Paper No. 255
By Ana Lasaosa
The subject of this paper is how the increase in transparency brought about by the Bank of England’s operational independence has changed the way in which markets react immediately after economic announcements. Other things being equal, the increase in transparency of the new framework will make monetary policy more predictable once the latest macroeconomic data are known. On this view, the market will be less sensitive to interest rate decisions and more sensitive to data releases. Previous research on the subject showed a more muted reaction to macroeconomic releases in the United Kingdom after 1997, and suggested that markets were still learning the rules of the new monetary framework. With two more years of data and a complementary analysis of trading activity, this study finds that macroeconomic announcements continue to move the markets less in the post-independence period, and interest rate changes the same or more. A separate analysis of the surprise announcements and the surprise component of each announcement reveals a similar pattern. Nor is the possibly greater impact of international announcements — another candidate explanation — borne out by the data. Finally, the paper finds that the reactions to macroeconomic announcements are in fact stronger in the second half than in the first half of the post-independence period. An increase in transparency is not the only change brought about by operational independence. Among other things, the collective nature of the Monetary Policy Committee and a perceived shift towards a more implicit policy rule since operational independence may have made its decisions harder to anticipate, thus decreasing the response to macroeconomic releases and increasing the reaction to monetary policy decisions.
Learning the rules of the new game? Comparing the reactions in financial markets to announcements before and after the Bank of England’s operational independence