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

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
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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