Hannah Phaup.
What’s the point of an ‘average’ mortgage rate, and why does it matter to the Bank of England? Mortgage rates often hit the news with headline-grabbing low rates, or rate increases for certain mortgage products. An average mortgage rate strips away the extremes, and as I will outline can represent both what is available to the average borrower, and what is experienced.
Continue reading “What can we discover from average mortgage rate stats?”
Nicholas Fawcett, Riccardo Masolo, Lena Koerber, Matt Waldron.
Introduction: forecasting and policy-making
Forecasting is difficult, especially when it concerns the future. If we needed a reminder, the 2008-09 financial crisis demonstrated that macroeconomic forecasts can be highly inaccurate when the economy is buffeted by large shocks (see, for example, Figure 1). But that is not a good reason to avoid forecasting: monetary policy takes time to work, so forecasts are indispensable in monetary policymaking. Instead, we need to understand how different models behave in the eye of the storm: do some cope better during breaks and crises than others? And can we make better forecasts by using information that is not normally included in economic models?
Continue reading “How did the Bank’s forecasts perform before, during and after the crisis?”
Dennis Reinhardt and Rhiannon Sowerbutts.
We find evidence that certain types of macroprudential regulation are avoided by borrowing from abroad. Borrowing by the non-bank sector from abroad increases after an increase in capital requirement, but not after an increase in lending standards. This is likely to be because of the way that the two regulations are applied and is supportive of strong frameworks for reciprocating capital regulation.
Marko Melolinna.
Productivity growth in the UK has been puzzlingly weak in recent years. By contrast, US productivity growth has been relatively robust at higher levels. There is a macroeconomic literature, however, that suggests that countries with lower levels of productivity should grow more quickly than high productivity countries. I argue that there is evidence of the UK catching up with the US in the past, but this relationship appears to have broken down after the financial crisis. If the past relationship between US and UK productivity returns, the prospects for UK productivity could be bright. But this improvement is likely to take time and will depend on fundamental drivers of productivity, like investment, R&D spending and educational attainment.
Continue reading “Productivity in the UK vs the US – can we play catch up again?”
Matthieu Chavaz, Jeremy Chiu and Evarist Stoja.
How might banks fare in stressful macroeconomic conditions? Are they strong enough to withstand the stress and survive or will they fall like dominoes? Stress tests offer insights into such questions.
Regulators are not only making a growing usage of such tests, they are also increasingly inclined to communicate openly about them. This is a remarkable evolution. Throughout history, regulators have typically followed some form of Hippocratic Oath and refrained from disclosing their detailed diagnostics of individual banks’ health. Regulators are now increasingly keen to release both the “answer” to stress tests (the results) and the “question” – the stress scenario regulators confront banks with. This column suggests that the disclosure of the scenario can be as important as – if not more than – the disclosure of the results.
Continue reading “The “question” or the “answer”? Market reaction to UK stress tests”
Evangelos Benos.
It’s been a while now since high-frequency-trading (HFT) made its debut in the financial market landscape. Initially, little was known about it and regulators and market participants alike were naturally concerned about its potential impact on markets. Nevertheless, over the past few years we have learned quite a bit more about HFT. So what’s the deal with HFT? This short blog post briefly describes the evolution of HFT, summarizes the current understanding of the impact of HFT on market quality and highlights some aspects of HFT activity that are still contentious. Regardless, I believe, the inescapable conclusion that so far emerges is that HFT has mostly had a positive impact on market functioning.
Continue reading “High-frequency trading and market quality: What’s the deal?”
Silvia Pepino.
Rational and behavioural factors can coexist in financial markets. The ‘search for yield’ (or ‘reach for yield’) observed in financial markets in recent years is a striking manifestation of the interaction of rational and behavioural factors. During an extended period of low interest rates and volatility, market participants have displayed a tendency to seek higher returns by investing in securities that carry higher credit, liquidity or duration risk. This tendency to search for yield appears to have been motivated by a mix of rational fundamental considerations, business and regulatory constraints, and behavioural biases.
Katie Stratford.
Before the crisis world trade tended to grow around twice as quickly as world GDP, but since 2012 trade growth has simply matched that of GDP. So what explains this weakness? Contrary to some other economists, this post finds no evidence that factors such as slowing growth of supply chains or the expenditure split of demand can explain the weakness relative to GDP. Instead, it is due to the changing composition of global activity: over time a greater share of world activity has been accounted for by countries whose imports grow more slowly relative to GDP. These trends are likely to continue, such that world trade is likely to grow more slowly relative to GDP than in the past.
Continue reading “Why has world trade been so weak in recent years?”
David Elliott, Chris Jackson, Marek Raczko and Matt Roberts-Sklar.
Oil prices have fallen by more than 50% since mid-2014. For much of this period, financial market measures of both short-term and longer-term inflation expectations appear to have mirrored moves in oil prices, particularly in the US and euro area. But how strong is the relationship between oil prices and financial market inflation expectations, and what should we make of it?
Continue reading “Does oil drive financial market measures of inflation expectations?”
Philip Bunn and Alice Pugh
“UK prepares for pensions spending spree” “House prices set to soar by 30 per cent as savers raid pension funds” These were some of the headlines which followed the pension reforms announced by the UK government in the 2014 and 2015 Budgets. But how much truth do they contain? In contrast to some of the headlines, results from a household survey commissioned by the Bank suggest that greater pension freedom will have only a small impact on household spending. And – although a number households would like to invest funds withdrawn from their pension in property – only a subset of these are likely to be able to afford to do so, and some may have bought property even without the reforms.
Continue reading “Will there really be a pensions spending spree?”
