Market beliefs about the UK monetary policy lift-off horizon: a no-arbitrage shadow rate term structure model approach

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Published on 14 August 2015

Working Paper No. 541
By Martin M Andreasen and Andrew Meldrum

We use a no-arbitrage shadow rate term structure model to estimate investors’ views about the timing of monetary policy ‘lift-off’ in the United Kingdom over time. Our estimates show that when the UK policy rate was first cut to 0.5%, in March 2009, investors believed that it would remain at the lower bound only for a short period, with an estimated probability of 70% that the policy rate would rise above 0.75% within twelve months. The estimated median horizon for policy rate lift-off rose sharply in 2012 but fell back to thirteen months by the end of our sample period, in May 2014.

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