Monthly Archives: January 2018

Population ageing and the macroeconomy

Noëmie Lisack, Rana Sajedi and Gregory Thwaites

An unprecedented ageing process is unfolding in industrialised economies. The share of the population over 65 has gone from 8% in 1950 to almost 20% in 2015, and is projected to keep rising. What are the macroeconomic implications of this change? What should we expect in the coming years? In a recent staff working paper, we link population ageing to several key economic trends over the last half century: the decline in real interest rates, the rise in house prices and household debt, and the pattern of foreign asset holdings among advanced economies. The effects of demographic change are not expected to reverse so long as longevity, and in particular the average time spent in retirement, remains high.

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Filed under International Economics, Macroeconomics

Trimming the Hedge: How can CCPs efficiently manage a default?

Fernando Cerezetti, Emmanouil Karimalis, Ujwal Shreyas and Anannit Sumawong

When a trade is executed and cleared though a central counterparty (CCP), the CCP legally becomes a buyer for every seller and a seller for every buyer. When a CCP member defaults, the need to establish a matched book for cleared positions means the defaulter’s portfolio needs to be closed out. The CCP then faces a central question: what hedges should be executed before the portfolio is liquidated so as to minimize the costs of closeout?  In a recent paper, we investigate how distinct hedging strategies may expose a CCP to different sets of risks and costs during the closeout period. Our analysis suggests that CCPs should carefully take into account these strategies when designing their default management processes.

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Filed under Financial Markets, Financial Stability, Market Infrastructure

Stirred, not shaken: how market interest rates have been reacting to economic data surprises

Jeremy Franklin, Scott Woldum, Oliver Wood and Alex Parsons

How do markets react to the release of economic data? We use a set of machine learning and statistical algorithms to try to find out.  In the period since the EU referendum, we find that UK data outturns have generally been more positive than market expectations immediately prior to their release. At the same time, the responsiveness of market interest rates to those data surprises fell below historic averages.  The sensitivity of market rates has also been below historic averages in the US and Euro area, suggesting international factors may also have played a role. But there are some signs that the sensitivity has increased over the past year in the UK.

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Filed under Financial Markets, Macroeconomics, New Methodologies

Is a steeper yield curve good news for banks? A challenge to the conventional wisdom

Oliver Brenman, Frank Eich, and Jumana Saleheen

The conventional wisdom amongst financial market observers, academics, and journalists is that a steeper yield curve should be good news for bank profitability.   The argument goes that because banks borrow short and lend long, a steeper yield curve would raise the wedge between rates paid on liabilities and received on assets – the so-called “net interest margin” (or NIM).  In this post, we present cross-country evidence that challenges this view.  Our results suggest that it is the level of long-term interest rates, rather than the slope of the yield curve, that drives banks’ NIMs.

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Filed under Banking, Financial Markets, Financial Stability, Monetary Policy

Bitesize: Financial services exports and financial openness: two sides of the same coin

Carlos Eduardo van Hombeeck

The UK has a comparative advantage in financial services. But specialisation in this activity brings with it the challenge of the large gross capital flows that are linked to financial services exports.

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Filed under Bitesize, Financial Stability, International Economics

Voting with their wallets? Consumer expectations after the EU referendum

Tamara Li, Nicola Shadbolt, Thomas Stratton and Gregory Thwaites

Consumption growth remained fairly steady in the immediate aftermath of the UK vote to leave the European Union in June 2016. But how did consumer expectations evolve in the first months after the referendum? We show with the Bank’s in-house household survey that ‘Leavers’ became more positive about the economy and their own financial situation after the referendum, with the opposite true for ‘Remainers’, and that this was reflected in spending by the two groups. But the size of the effect was small.

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Filed under Macroeconomics

Who’s driving consumer credit growth?

Ben Guttman-Kenney, Liam Kirwin, Sagar Shah

Consumer credit growth has raised concern in some quarters. This type of borrowing – which covers mainstream products such as credit cards, motor finance, personal loans and less mainstream ones such as rent-to-own agreements – has been growing at a rapid 10% a year. What’s been driving this credit growth, and how worried should policymakers be?

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Filed under Financial Stability, Macroeconomics, Macroprudential Regulation, Microprudential Regulation

How does uncertainty affect how UK firms invest?

Marko Melolinna and Srdan Tatomir

Uncertainty is in the spotlight again. And the MPC believe it is an important factor influencing the slowdown in domestic demand (August 2017 Inflation Report). Previous work by Haddow et al. (2013) has found a composite aggregate indicator of uncertainty combining several different variables that does appear to have explanatory power for GDP growth; but as Kristin Forbes notes these measures correlate better with consumption than investment. So in this blog post, we look at firm-level data to explore measures of uncertainty that matter for how firms invest in the United Kingdom. Our aggregate measure of uncertainty has a better forecast performance for investment than the composite aggregate indicator does.

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Filed under Financial Markets, Macroeconomics