Alex Haberis, Richard Harrison and Matt Waldron.
In textbook models of monetary policy, a promise to hold interest rates lower in the future has very powerful effects on economic activity and inflation today. This result relies on: a) a strong link between expected future policy rates and current activity; b) a belief that the policymaker will make good on the promise. We draw on analysis from our Staff Working Paper and show that there is a tension between (a) and (b) that creates a paradox: the stronger the expectations channel, the less likely it is that people will believe the promise in the first place. As a result, forward guidance promises in these models are much less powerful than standard analysis suggests.
In recent years there has been a notable move to lenders charging a daily or monthly fee on overdrafts. Although not technically an interest rate, they are nonetheless a cost of borrowing. And in some cases, may have replaced interest charges entirely. So are customers charged more than the interest-charging overdraft rate alone suggests?
Since 2012, long term rates have fallen and there have been various other policy packages to boost credit availability and lower borrowing costs. But how have these fed through to different types of fixed mortgage rates?
How have falling retail deposit interest rates affected savers’ behaviour? One place to look is the market for fixed-rate bonds, which give a guaranteed interest rate for a set period of time. These rates tend to be higher than instant access accounts, because customers must tie up their deposits to receive the higher rate. Fixed-rate bonds represented around 40% of new time deposits in January 2017. Continue reading
Evidence suggests that small and medium-sized businesses (SMEs) rely more on bank credit than other businesses. So how has their cost of borrowing fared since last year’s Bank Rate cut? And how do their rates compare with overall businesses? Continue reading
Changes in Bank Rate and other monetary policy instruments feed through to the real economy by various channels – including the rates of interest for borrowers and savers. But in practice, there are many of these “interest rates” depending on the type of product, who is borrowing/saving, and on what terms. The Bank has recently published a new range of interest rate statistics that help policymakers, researchers and the general public better understand how policy changes feed through to household and firms in the economy. Over the next four days, we’ll publish a bitesize post a day highlighting a different interest rate series and thinking about what it might mean for monetary conditions.
Economists usually talk about money serving three functions – a medium of exchange, a store of value, and a unit of account. But the ability to make payments using commercial bank deposits, which account for the vast majority of money, has already divorced the physicality of notes from the concept of the medium of exchange. Inflation and non-remuneration renders physical money a poor store of value. And the unit of account does not rely on physical cash. So is there a specific role for physical paper money anymore?
A fall in the real exchange rate can increase demand for domestic output in two main ways. The volume of exports – which become cheaper – is boosted. And goods and services that were previously imported can instead be supplied by domestic producers, which become more competitive as the price of imports rises. Economists call the second effect ‘import substitution’. Using data from Supply-Use tables can help us better understand the process of import substitution, in particular by examining how the composition of expenditure has influenced imports. Doing so shows that the import substitution effect of the 2008-09 depreciation was partly masked by other, co-incident factors.
The topics of central bank digital currency (CBDC) and distributed ledger technology (DLT) are often implicitly linked. The genesis of recent interest in CBDC was the emergence of private digital currencies, like Bitcoin, which often leads to certain assumptions about the way a CBDC might be implemented – i.e. that it would also need to use a form of blockchain or DLT. But would a CBDC really need to use DLT? In this post I explain that it may not be necessary to use DLT for a CBDC, but I also consider some of the reasons why it could still be desirable.
Jeremy Chiu, Richard Harris and Evarist Stoja
Financial market shocks: do they matter for the economy?
Financial markets are intrinsically volatile, constantly fluctuating in response to a wide variety of news. Often, these shocks to volatility are short-lived, perhaps reflecting a one-off adjustment in asset prices or the market’s overreaction to news, and have a tendency to dissipate rapidly. But sometimes they lead to a sustained increase in market volatility, reflecting a deeper uncertainty over the future macroeconomy that can take time to resolve itself. Indeed, a considerable body of empirical evidence suggests that financial market volatility is made up of two components: a slowly varying ‘core’ component and a ‘transitory’ component that dissipates quickly. We develop a way to identify each type and estimate how they affect the broader economy.