War and payment innovation: the adoption of paper currency in Britain

David Rule

Digital currencies and stablecoins have increased interest in how new forms of money are adopted. Looking to three episodes from the 1690s to the First World War, this post considers how paper currency replaced coin in Britain, an historical example of adoption of new money. The underlying drivers were not technological changes but wars, leading to actual or feared shortages of coin, and a need to take specie out of internal circulation in order to meet overseas outflows. The public authorities took the initiative and created trust successfully in the new money. This is the first of a series of planned posts by Bank staff on past payment innovations.

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When mortgage flexibility meets monetary policy tightening: heterogeneous impacts on spending and debt

Philippe Bracke, Matt Everitt, Martina Fazio and Alexandra Varadi

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Macroeconomic Environment Theme which focuses on the changing inflation dynamics and unfolding structural change faced by monetary policy makers.

How do mortgagors adjust spending, savings and debt during monetary tightening? In a recent paper, we explore this question using a novel data set on household transactions and mortgage records. About 30% of households used mortgage flexibility when facing higher borrowing costs since late 2021, as their fixed-rate contracts ended. Some extended repayment periods to lower monthly payments, while others increased borrowing by extracting housing equity – leveraging nominal price gains since the pandemic – to sustain spending and reduce unsecured debt. Those unable or unwilling to use mortgage flexibility, cut spending significantly. We thus document the dual role of mortgage flexibility at refinancing: it helps smooth consumption aiding financial resilience; but it may also dampen monetary policy transmission for some households.

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Muddled measurements on clarity

Charlie Warburton and James Brookes

Economists have repeatedly shown that readability of central banking communication matters. But they typically measure readability in a crude way – using the simplistic but influential Flesch-Kincaid metric. The Flesch-Kincaid Grade Level is based on word and sentence length and is commonly interpreted as the number of years of education required to understand a text. However, recent advances in computational linguistics toolkits empower us to consider finer-grained markers of language comprehension missed by Flesch-Kincaid. Here, we revisit Jansen (2011) which found that Fed Chair testimonies with lower Flesch-Kincaid Grade Level scores – indicating higher readability – were associated with lower market volatility. Our results show that compared to more sophisticated linguistic metrics, Flesch-Kincaid is a relatively poorer indicator of readability.

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What happens to inflation when we put a price on carbon?

Hannah Copeland, Lennart Brandt, Natalie Burr and Boromeus Wanengkirtyo

Emissions Trading Schemes (ETS) are an increasingly popular market-based policy to impose a price on carbon emissions (previously costless to the emitter) (World Bank Group (2025), DESNZ (2025)). With carbon prices expected to increase steadily, and sectoral coverage broadening, these schemes have gained the attention of monetary policy makers (Breeden (2025), Mann (2023)). But what are the implications for inflation? By constructing a new tool (a high-frequency identified ‘instrument’) to measure the impact of supply shocks in the UK carbon market, we document that a tighter carbon pricing regime temporarily increases energy prices and inflation, and decreases output. We find that this shock transmits through multiple energy-related commodity prices, including oil and gas, compounding cost-push pressures arising from the energy sector.

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More mortgage lending might push home ownership further out of reach

Jamie Waddell and Danny Walker

Would expanding mortgage supply lead to increased home ownership? Given that 90% of young home owners have a mortgage, it’s tempting to assume the answer is yes. But our analysis suggests that assumption is not necessarily true. We show that increases in mortgage supply have historically had no discernible effect on the home ownership rate and instead tend to push up on house prices, which makes it harder for first-time buyers (FTBs) to afford their first home. They also tend to divert lending towards home-movers and there is some evidence that they increase rents too.

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Tracking the price of carbon: price substitution effects across energy markets

Dooho Shin and Rebecca Mari

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Financial System Theme which focuses on the shifting landscape and new risks confronting financial policymakers.

Carbon pricing has emerged as one of the main mitigation measures adopted around the world to fight climate change. In the UK and EU, increases in carbon prices in the Emissions Trading Schemes (ETS) work as an incentive to substitute away from emissions-intensive activities and sources of power. Such increases can be a result of direct government policies, but as we explain in this post, changes in carbon prices appear to be also endogenously linked to developments in energy markets. An understanding of the possible transmission channels underlying the relationship between the two is important to assess how climate-related risks are linked to broader macroeconomic developments and thus monetary and financial stability.

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GIV us some credit: estimating the macroeconomic effects of credit supply shocks

Sam Christie and Aniruddha Rajan

Sudden contractions in credit supply can trigger and amplify recessions – a reality made painfully clear by the 2008 global financial crisis (GFC). However, quantifying these real economic effects is challenging. In this post, we demonstrate a novel way to do so using Granular Instrumental Variables (GIV), focusing on the UK mortgage market. The core idea is that we can exploit the market’s concentration to build up exogenous fluctuations in aggregate credit supply from idiosyncratic lender-specific shocks. Using our GIV, we find evidence that contractionary mortgage supply shocks can have quantitatively significant effects on the macroeconomy, causing persistent decreases in output, consumption, and investment, alongside increases in unemployment.

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Why do government bond yields drift when news is on its way?

Danny Walker, Dong Lou, Gabor Pinter and Semih Üslü

Government bond yields tend to drift higher in the days before monetary policy or data news in the UK. Over the past two decades this tendency – which we label ‘pre-news drift’ – has pushed up on yields by 2 percentage points in total over that period. The drift concentrates in pre-news periods that coincide with the issuance of UK government bonds, which is more common than it used to be. Our analysis shows that dealers and hedge funds are reluctant to buy bonds when news is on its way, which pushes up yields. Pre-news drift could affect the signal monetary policy makers draw from market rates and it could have implications for the optimal timing of bond issuance. There are further details in an associated working paper.

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Fossicking in the dark or twenty-twenty foresight?

Rishi Khiroya and Lydia Henning

If you asked people what skill they would most love to have, you might receive answers like ‘to fly’, ‘to be invisible’ or even ‘predicting the future’. If you asked people who worked in financial markets in particular, ‘accurately predicting the future’ would probably be top of the list. From economic trends to political shifts, market participants have a stake in anticipating what comes next. We use data collected from the Bank’s Market Participants Survey (MaPS) to see how market predictions have tended to compare with what subsequently unfolds over the period of high uncertainty and volatility that has been observed in the wake of the pandemic – and how predictive accuracy has varied depending on the time horizon in question.

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The Bank of England’s statutory monetary policy objectives: a historical and legal account

Michael Salib and Mesha Ghazaleh

The Bank’s monetary policy objectives are some of the most significant objectives bestowed by Parliament on any UK public authority. They are to maintain price stability and, subject to that, support the Government’s economic policy, including its objectives for growth and employment. In our paper we offer a historical and legal account of the Bank’s monetary policy objectives by looking at their origins, the parliamentary debates around their wording and their interpretation in practice. Since being introduced in 1998, our paper finds that they have proved remarkably resilient in directing the Bank’s monetary response over the past 25 years, partly due to the in-built flexibility in their wording.

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