Category: Monetary Policy

What does the rise in the inflation mean for financial stability?

Kristina Bluwstein, Sudipto Karmakar and David Aikman

Introduction

Inflation reached almost 9% in July 2022, its highest reading since the early 1990s. A large proportion of the working age population will never have experienced such price increases, or the prospect of higher interest rates to bring inflation back under control. In recent years, many commentators have been concerned about risks to financial stability from the prolonged period of low rates, including the possibility of financial institutions searching for yield by taking on riskier debt structures. But what about the opposite case? What financial stability risks do high inflation and increasing interest rates pose?

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Bitesize: Riding the waves: the breadth of global monetary policy changes

Shaheen Bhikhu and Thomas Viegas

Central banks respond to inflation by setting interest rates in order to achieve domestic price stability.  Occasionally, economic shocks are global in nature and so monetary policy can move in tandem across the world. But how common have directional changes in monetary policy been across the world over recent decades?

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Bonus episode: understanding pay and labour market tightness

Josh Martin

Everyone likes a bonus – be it a bonus in pay, or a bonus episode for your favourite TV show. Everyone, that is, except statisticians. Bonuses are hard to define and measure and are often excluded from data on pay. But bonuses could be really important to understand labour market tightness – a topic of much interest at the moment. This blog takes a quick walk through some pay measures, highlighting the role of bonuses, and exploring what has happened to bonuses before, during and since the pandemic.

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Monetary policy transmission during QE times: role of expectations and premia channels

Iryna Kaminska and Haroon Mumtaz

Since 2009, when policy rates reached their effective lower bound, quantitative easing (QE) has become an important instrument of central bank monetary policy. It is aimed to work via long-term yields. The literature confirms that QE helped lower long-term yields. But the yields have two components – expectations and term premia – and open questions remain: does QE reduce yields via expected rates or term premia? And which channel is more efficient in stimulating the economy? In our research paper, we find evidence that QE often worked through signalling and term-premia effects simultaneously. But the two main QE channels are transmitted to financial markets and the real-economy in different ways, and only signalling is found to have ultimately affected inflation significantly.

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Rolling substitutions in financial markets: did quantitative easing in 2020 lead to portfolio rebalancing?

Jack Worlidge

Purchases of government bonds have been a prominent tool that has helped central banks meet inflation objectives when short-term interest rates have been constrained by their effective lower bounds. But how does QE work? There are a range of channels through which QE can/might operate, though there remains uncertainty over the relative size and importance of these channels. This post presents new evidence from granular transaction data consistent with a portfolio rebalancing channel. Specifically, during the Bank’s latest QE programme (known as QE5) investors were found to have bought less new gilt issuance and bought more risky assets like corporate bonds.

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Adapting lending policies in a ‘negative-for-long’ scenario

Miguel García-Posada and Sergio Mayordomo

In February, the Bank hosted its inaugural Bank of England Agenda for Research (BEAR) conference, with the theme of ‘The Monetary Toolkit’. As part of our occasional series of Guest Posts by external presenters at Bank research events, the authors of one paper from the BEAR conference outline their findings on the effect of negative rates on Spanish banks…

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Monetary and fiscal policy in interwar Britain

David Ronicle

Macroeconomic outcomes in Britain’s interwar years were terrible – they featured two of modern Britain’s worst recessions, unemployment twice peaked above 20% and was rarely below 10% and there were two periods of chronic deflation. Policy, meanwhile, was pulled in multiple directions by multiple objectives – employment, price and financial stability and debt sustainability. These challenges gave birth to modern macroeconomics, inspiring the work of John Maynard Keynes. In a new working paper, I apply modern empirical techniques to look at the period with fresh eyes. I find that monetary and fiscal policy played a central role in macroeconomic developments – and that outcomes could have been better had policymakers been less wedded to the traditional policy consensus, and especially the Gold Standard.

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More than words: Bank of England publications and market prices

Timothy Munday

How easy is it to understand this sentence you are currently reading? How easy it is to understand this sentence that has dependency arcs that are longer that make it more difficult to read? How about if my writing is magniloquent? Or what if I use normal words? Writing style matters for how easy it is to read text. This post asks if writing style can influence how long markets take to digest Bank of England monetary policy information. I find that Bank of England publications that summarise their content in the first sentence, and use less unexpected vocabulary, are associated with a faster time for swap markets to reach a new equilibrium price following the publication release.

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Financial concerns and the marginal propensity to consume

Georgina Green and Bruno Albuquerque

How would you respond to a one-off change in your income? For example, how would you react to someone handing you £500? Throughout the pandemic a large group of UK households were asked this hypothetical question in a survey. Households were also asked for other information, for instance about their debt, savings, and expectations for the future, giving us an opportunity to unpick their responses. We might expect households who are concerned about their financial future to be less eager to spend than others, preferring to save up for rainier days. In a new paper, we find the opposite result: concerned households would in fact spend around 20% more than others.

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