When the financial system becomes searchable

Andreas Viljoen

Financial crises rarely begin with one self-contained weakness. They emerge when vulnerabilities connect: leverage meets a margin call; a margin call meets an illiquid market; falling prices meet common collateral; and a funding concern becomes a run. Before the event, each link may sit in a different spreadsheet, institution or jurisdiction. Afterwards, the route through them can look obvious. This post explores a possibility raised by advances in artificial intelligence (AI): that the financial system could become searchable, making more of those routes visible beforehand. It outlines two specific scenarios and their implications for financial authorities. First, system-wide testing by authorities should learn to search the way agents will. And consequential agent decisions and actions should be observable in operation, unlike today.

Continue reading →

When the floor rises: how Basel output floor could tilt bank lending

Marzio Bassanin

The 2017 finalisation package of the Basel III reforms to bank capital regulation aims to make capital requirements more robust and consistent across banks. One of its most significant changes is the introduction of the ‘output floor’, which limits how far capital requirements calculated using internal models can fall below those based on standardised approaches. But the output floor is not just about capital levels. We find that it may tilt lending towards corporate loans and some riskier mortgages, and away from the safest mortgages. And if banks’ responses to past reforms are any guide, banks won’t wait until its full implementation in 2030 to start reacting.

Continue reading →

A new framework for monitoring risks in the UK housing market

Tihana Škrinjarić

In my recent paper, I present a new model that helps assess risks in the UK housing market. Unlike traditional approaches that focus on average house price growth, the model estimates a full range of possible outcomes, allowing policymakers to identify potential risk of big house price drops. The analysis also highlights important regional differences: areas with more constrained housing supply tend to be more sensitive to changes in interest rates. Expanding supply can help ease price pressures. These insights can help improve the monitoring of housing market vulnerabilities and support financial stability policy.

Continue reading →

Distributional consequences of borrower-based macroprudential tools

Jagdish Tripathy, Arzu Uluc, José-Luis Peydró and Francesc Rodriguez-Tous

Borrower-based macroprudential measures – such as limits on loan to income (LTI) and loan to value (LTV) ratios – have become a standard feature of the post-crisis regulatory landscape. A growing body of country-specific evidence suggests these measures are effective in moderating the self-reinforcing loop between mortgage credit and house prices, and in reducing default rates and limiting house price volatility during periods of economic stress. Yet their distributional consequences are less well understood. In a new paper, we survey the existing evidence and find that these tools deliver clear financial stability benefits, while also generating distributional effects across borrower groups. Further, we identify areas where future research is needed to provide a comprehensive welfare assessment of these measures.

Continue reading →

Monetary policy transmission: it’s all in the curve

Sofia Carollo and Natalie Burr

While monetary policy sets short-term policy rates, households and firms borrow at varying time horizons. How a policy decision reshapes the whole yield curve therefore matters. We trace the reactions of yields in narrow windows around UK monetary policy announcements across two dimensions: a ‘level’ surprise that shifts the entire curve and a ‘slope’ surprise that changes its steepness. We find that a level surprise affects CPI inflation more than a slope surprise does; this result is difficult to recover from surprises that conflate the two dimensions. So, the policy rate tells only part of the story: two curves considered equivalent from a stance perspective can lead to different inflation outcomes. Policymakers must be attuned to these differing effects.

Continue reading →

Has UK food inflation been under the weather?

India Rimmer, Hannah Copeland and Boromeus Wanengkirtyo

Global extreme weather events may feel far away, but they leave behind a trail of higher prices in our shopping baskets. As outlined in past Monetary Policy Reports, droughts, flooding and heatwaves occurring overseas often impact UK food inflation, which averaged 4.2% in 2025. But how much of the rise in food inflation last year can we blame on the weather? By constructing a new proxy for global weather shocks, we find that they increase UK food prices with a peak impact after one year. In the latest period, our model suggests that weather shocks contributed 0.8 percentage points to food inflation at peak in May 2025. Weather continues to matter for inflation amidst the current El Niño phenomenon.

Continue reading →

Is UK productivity growth low? A historical and cross-country perspective

Sophie Piton and Fabrizio Cadamagnani

A lot has been written about UK productivity and how weak it’s been in recent years. This post assesses UK productivity trends in a historical and cross-country perspective. Productivity growth has been weak across G7 economies over the past two decades, reflecting the end of the information and communications technology (ICT) revolution and the flattening gains from globalisation. The slowdown was particularly large in the UK, mainly because it experienced a larger decline in the share of manufacturing than peers and then because of the impact of Brexit. In recent years, US productivity growth has been accelerating thanks to tech, offering some optimism for the future of UK productivity.

Continue reading →

Who’s paying attention? How firms form policy rate expectations

Lea Havemeister, Nicholas Bloom, Philip Bunn, Paul Mizen, Gregory Thwaites and Ivan Yotzov

Monetary policymakers carefully craft their policy decisions and communication, and financial markets respond quickly. Yet the effect of policy on the economy ultimately depends on how firms perceive and anticipate monetary policy. We present new data from an economy-wide UK business survey on Bank Rate perceptions and expectations. The data provide direct evidence on monetary policy transmission, specifically on how firms form and update policy rate expectations. Firms’ perceptions of current policy rates are precise, and expectations adjust rapidly to policy decisions within days. Moreover, more productive firms and those with higher levels of borrowing forecast policy rates more accurately. CEOs and CFOs also link policy rate expectations to inflation expectations in ways consistent with standard macroeconomic models.

Continue reading →

Does higher productivity create inflationary or disinflationary pressure?

Ludovica Ambrosino, Jenny Chan and Silvana Tenreyro

Recent technological advances raise an important question for policymakers: will higher productivity lead to disinflationary or inflationary pressure? A coming wave of AI-driven productivity growth is often described as a disinflationary tailwind that would allow central banks to hold interest rates lower without reigniting inflationary pressures. Yet faster productivity growth can just as plausibly call for higher, not lower, interest rates. By raising expected future income and the returns to investment, it stimulates consumption and investment today, pushing up the natural rate of interest. Neither view is entirely wrong and our model reconciles the two by showing that the answer depends on the timing, permanence, and sectoral origin of the productivity shock.

Continue reading →

If AI disappoints? The transmission of US big-tech earnings news

Daniel Ostry, Roger Vicquéry and Emilio Zaratiegui

There is growing concern among policymakers, international organisations, and even big-tech Chief Executive Officers (exhibits I, II and III) that the current artificial intelligence (AI) boom features valuations increasingly detached from fundamentals. The Bank’s February 2026 Monetary Policy Report noted that an asset price correction is a key risk to the global economy, while the Bank’s July 2026 Financial Stability Report presented a scenario for how an AI correction could unfold. In this post, we study how negative big-tech earnings news transmits to global markets, which informed discussions around this scenario. We find that the effects ripple far beyond tech: equity indices decline, credit spreads widen and the US dollar depreciates. This last result, together with the limited response of Treasury yields, suggests muted flight-to-safety dynamics, unlike other financial stress episodes.

Continue reading →