What is the information content of oil futures curves?

Julian Reynolds

Moves in oil prices have significant implications for the global economic outlook, affecting consumer prices, firm costs and country export revenues. But oil futures contracts tend to give an imperfect steer for the future path of oil prices because, at any given time, futures contracts may be affected by a wide range of fundamental drivers, besides the expected path of future spot prices. This post presents an empirical methodology to determine the so-called ‘information content’ of oil futures curves. I decompose the oil future-to-spot price ratio into structural shocks, which reflect different fundamental drivers of futures prices, in order to identify the extent to which futures prices reflect market information about the outlook for spot prices.

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Bitesize: The pricing of credit risk

Barbara Jankowiak, Natan Misak and Nicholas Vause

Both financial market participants and regulators have suggested that investor risk appetite has declined since the beginning of the year. This post presents some evidence from credit markets consistent with such developments, and offers two possible explanations.

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When the lights go out: why does operational risk matter for financial stability?

Rachel Adeney and Amy Fraser

Operational risk is rapidly becoming one of the most important threats to the financial system but is also one of the least well understood. Cyber attacks are regularly cited as one of the top risks faced by firms in the financial sector and one of the most challenging to manage. But they are only one part of operational risk, which includes losses from any kind of business disruption or human error, including power outages or natural disasters. In this post we discuss why operational risk matters for financial stability, how policymakers have responded to increasing risks from operational disruptions and the future challenges that may arise in this space.

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How broad-based is the increase in UK inflation?

Galina Potjagailo, Boromeus Wanengkirtyo and Jenny Lam

CPI inflation in the UK has markedly increased over the last year, reaching 10.1% in September. The aggregate increase reflects potentially different dynamics across disaggregated prices, from which CPI inflation is constructed. How much of the increase has been broad-based across a wide range of prices? We assess this through a measure of ‘underlying inflation’ that captures comovement across many disaggregated prices – energy, food and other (‘core’) price items. We observe a substantial rise in underlying inflation, hence many prices have increased jointly. Broad-based energy price increases have been the main driver of underlying inflation. Furthermore, about a quarter is due to core price items which reflect more persistent inflation.

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Capitalising climate risks: what are we weighting for?

David Swallow and Chris Faint

Policymakers have been investing heavily, to an accelerated timeline, to better understand the financial risks from climate change and to ensure that the financial system is resilient to those risks. Against that background, some commentators have observed that the most carbon-intensive sectors may be subject to the greatest increase in transition risk. They argue that these risks are not currently included within risk weights in the banking prudential framework and that regulators should adjust the framework to include them. Conceptually, this argument sounds credible – so how might UK regulators approach whether to adjust the risk-weighted asset (RWA) framework to include potential increases in risks? This post updates on some of the latest thinking to help answer this question.

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Old problems with new assets: some of crypto’s challenges look strangely familiar

John Lewis

Cryptoassets and the crypto ecosystem as a whole has to face many of the same challenges as conventional assets and the regular financial system do. The same classic problems which are staple of economics textbooks (and history books), such as maturity mismatch, liquidity shortages, credibility, and collateral feedback loops. But whereas the conventional system has learned from the past and evolved to deal with them, much of the crypto ecosystem seems to have overlooked them. In this post I draw out the parallels between previous issues in the traditional financial system and recent crypto turbulence. I argue that when crypto goes wrong, it often goes wrong in strikingly conventional, even old-fashioned ways.

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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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Swing or amiss: are fund pricing rules good for financial stability?

Benjamin King and Jamie Semark

Open-ended funds (OEFs) offer daily redemptions to investors, often while holding illiquid assets that take longer to sell. There is evidence that this mismatch creates an incentive for investors to redeem ahead of others, which could lead to large redemptions from OEFs and asset price falls. Some research has suggested that ‘swing pricing’ can help to moderate these redemptions, but until now, no-one has considered the impact of its use on the wider economy. In a recent paper, we carry out a financial stability cost-benefit analysis of more widespread and consistent usage of swing pricing by OEFs, finding that enhanced swing pricing could reduce amplification of shocks to corporate bond prices, providing benefits to the financial system and economy.

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Trapped in a web of debt? Inefficiencies from corporate debt and the potential case for macroprudential intervention

Emily Clayton and Martina Fazio

Debt creates threads between the financial system and the real economy. These threads transmit shocks across a web of connections, meaning that financial shocks may pose risks to households and businesses, and real-economy shocks may jeopardise financial stability. These threads can also become entangled into knots – sources of inefficiency. Macroprudential regulators in the UK have already intervened partially to disentangle the inefficiency from consumption cuts by over-indebted households. In the next decade, policymakers could consider whether a similar intervention is needed to limit corporate debt. In this post, we map the threads that corporate debt creates, identifying areas where entanglement may have created inefficiencies, and considering the potential case for borrower-based tools to unravel them.

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