Category: Monetary Policy

Launch of the 2025–28 Bank of England Agenda for Research

Misa Tanaka

Today the Bank published the 2025–28 ‘Bank of England Agenda for Research’ setting out the key areas for new research over the coming years and a set of priority topics for 2025.

Misa Tanaka works in the Bank’s Research Hub and is the Bank’s Head of Research.

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Stable gilts and stable prices: assessing the Bank of England’s response to the LDI crisis

Nicolò Bandera and Jacob Stevens

How should the central bank conduct asset purchases to restore market functioning without causing higher inflation? The Bank of England was faced with this question during the 2022 gilt crisis, when it undertook gilt purchases on financial stability grounds while inflation was above 10%. These financial stability asset purchases could have counteracted the monetary policy stance by easing financial conditions at a time when monetary policy was tightening them. Did a trade-off between price and financial stability arise? In our Staff Working Paper, we find the asset purchases stabilised gilt markets without materially affecting the monetary policy stance. This was only possible because the intervention was temporary; highly persistent asset purchases would have created tension between price and financial stability.

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Weathering the storm: the economic impact of floods and the role of adaptation

Rebecca Mari and Matteo Ficarra.

Floods are the most costly natural disaster in Europe. In the UK, they account for around GBP1.4 billion in annual losses. Yet, evidence on the macroeconomic implications is inconclusive. GDP often shows a puzzling delayed response, and prices can be pushed in opposite directions. Using a novel county level data set for England for the years 1998–2021, we estimate the impact of flooding on output and inflation at the sector level. Sectors react heterogeneously to floods, which explains well aggregate evidence. Prices respond in sectors related to both headline and core inflation, which has crucial implications for monetary policy. We further show that investing in flood defences mitigates the economic burden of floods by strongly reducing the risk of flooding.

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Some implications of climate policy for monetary policy

Francesca Diluiso, Boromeus Wanengkirtyo and Jenny Chan.

This post examines key aspects of climate mitigation policies that could matter for monetary policy, using insights from structural climate macroeconomic models (Environmental Dynamic Stochastic General Equilibrium). Three main findings emerge: first, mitigation policies – like carbon pricing – can be a direct source of shocks, creating potential trade-offs for monetary policy (Carney (2017)). Second, the degree to which these policies are anticipated affects their macroeconomic impacts. Third, different climate policies may alter the transmission of conventional business-cycle shocks, therefore affecting the calibration of optimal monetary policy. We focus on the 3–5 year horizon, abstracting from longer-run considerations and changing trends such as interactions with the zero lower bound, the natural interest rate, or transitional effects on productivity and output.

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Nonbank lenders as global shock absorbers

David Elliott, Ralf Meisenzahl and José-Luis Peydró

Capital flows and credit growth are strongly correlated across countries. Macroeconomic evidence suggests that this ‘global financial cycle’ is largely driven by US monetary policy: expansionary policy by the Federal Reserve drives increases in lending globally, while contractionary Fed policy leads to a tightening of global financial conditions. Existing academic literature emphasises the role of banks in propagating these US monetary policy spillovers. But in recent decades, nonbank financial intermediaries have grown in importance. In a recent paper, we investigate the impact of US monetary policy on international dollar lending by nonbanks relative to banks, and show that nonbank lenders play an important role in absorbing US monetary policy shocks.

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International spillovers from climate policy

Francesca Diluiso and Aydan Dogan

To achieve the emissions reduction targets outlined in The Paris Agreement, many economies have started implementing various types of climate policies. These policies, which include subsidies for green production or investment, carbon taxes, and cap and trade schemes, are crucial for guiding the transition to a greener economy. However, by altering the cost and the emission intensity of domestically produced goods, they may have an impact on inflation, output, and international trade flows. This blog post explores the spillover effects due to the implementation of climate policy in a single country. We examine two major types of policies currently implemented and discussed worldwide: green subsidies and carbon taxes.

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Global value chains and inflation: how imported inputs shape UK prices

Aydan Dogan, Melih Firat and Aditya Soenarjo

How does the use of imported inputs in production affect inflation dynamics in the UK? Over the past few decades, with the rise of global value chains (GVCs), production processes have become increasingly interlinked across countries and sectors. This interconnection means that firms’ pricing decisions are now more influenced by foreign factors. The importance of globalisation in shaping inflation dynamics was highlighted during the supply-chain disruptions caused by the Covid-19 crisis. In a recent paper, we explore the impact of the rising share of imported intermediate goods on the UK Phillips curve. We show that UK industries with higher shares of intermediate imports from emerging market economies (EMEs) have flatter Phillips curves.

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High hurdles: evidence on corporate investment hurdle rates in the UK

Krishan Shah, Phil Bunn and Marko Melolinna

An important way in which monetary policy impacts the economy is through its effects on the capital expenditure of firms. When policy rates are raised (and as long as risk-premia remain unchanged) firms’ cost of capital increases. A higher cost of capital should lead firms to increase their required return (or hurdle rate) on investment, resulting in fewer projects exceeding the hurdle rate and less investment overall. For monetary policy to impact investment, changes in the cost of capital need to pass through to hurdle rates. Using new survey evidence, we find that hurdle rates for UK firms tend to be high, and they have responded sluggishly to higher interest rates over the past two years.

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State-dependent effects of UK monetary policy

Vania Esady

Monetary policy actions transmit to inflation and real activity with ‘long and variable’ lags. However, it is not obvious how the effectiveness of monetary policy varies across economic states (for instance pace of economic growth). The academic literature suggests the possibility effects of monetary policy being state dependent. For example, Tenreyro and Thwaites (2016) find that the effects of monetary policy is weaker in recessions. Many existing works are based on US data – raising the question how relevant these findings are to the UK economy, which is where this post aims to add. This work also fed into the recent Quarterly Bulletin on how monetary policy transmits.

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