Why short-term finance matters (a lot more) to exporting firms

Aydan Dogan and Ida Hjortsoe

Exporting allows firms to access a larger market, but it also implies costs and risks. Some of these costs and risks are due to the time between production and sales generally being longer for exported goods than for goods sold in the domestic market. In our recent Staff Working Paper, we find that among UK manufacturing firms, exporters tend to have more liabilities than non-exporters, and we show that the link between short-term liabilities and labour costs is significantly tighter for exporters. This novel evidence supports the view that exporters’ short-term liabilities help cover costs and risks over the longer time period between production and sales. Consequently, financial conditions are likely to affect exporters more than non-exporters.

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A summary measure for UK households’ resilience

Vania Esady and Stephen Burgess

A summary measure for UK households’ resilience

High levels of household debt have been shown to amplify recessions. For example, in the global financial crisis (GFC), UK households with more debt tended to cut back their spending disproportionately, amplifying aggregate demand effects and potentially making the recession worse. High levels of household (and corporate) debt can pose risks to the UK financial system through two main channels: lender resilience and borrower resilience. However, monitoring households’ resilience to future shocks is not an easy task. In this post we construct some new summary measures of borrower resilience. We show that increases in debt-servicing costs or in the flow of credit to households could make households less resilient overall.

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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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Growth-at-Risk for macroprudential policy stance assessment: a survey

Tihana Škrinjarić

How effective is macroprudential policy and how should policymakers measure its stance? My recent paper surveys the literature on the topic of Growth-at-Risk (GaR), which has been developed as a methodology to provide answers to these questions by relating the effects of macroprudential policy tools to real-economy dynamics. While the results are mixed, the consensus finds a positive impact from macroprudential policy tightening during the expansion of the financial cycle. Policy loosening reduces the potential GDP losses during contractions, with the effects being more prominent in the medium term. Several challenges within this framework still exist. Resolving these would lead to a more accurate evaluation of macroprudential policy effectiveness. Finally, I discuss GaR policy applications.

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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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SONIA: steady as she goes

Joanna McLafferty, Kirstine McMillan and Joseph Smart

On 7 May 2024 the SONIA rate, the UK’s risk-free reference rate, printed at exactly 5.2000% and has remained there to the end of July 2024 (the time of writing). Flatlining of SONIA is not a phenomenon we see often. Prior to this, over the past six years SONIA had been ‘flat’ for only four consecutive days, on two occasions. So how is it possible for the SONIA calculation methodology to create such a flat rate? What is happening in the underlying market? And most importantly… does the lack of volatility indicate an issue? We argue this should not cause concern since flatlining is explained by the calculation mechanics and behavioural dynamics in the market.

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Central bank balance sheet policies and the market for reserves

Michael Kumhof and Mauricio Salgado-Moreno

While ‘unconventional’ balance-sheet policies like quantitative easing (QE) and quantitative tightening (QT) appear to have been successful, it is difficult to separate their macroeconomic and financial stability implications from those of other polices. Hence, in a recent paper, we develop a theoretical framework, focusing on the central bank’s liabilities, that sheds light on these implications. The key model feature is the inclusion of a detailed financial system with both heterogeneous banks and non-bank financial institutions that allows us to identify the transmission of QE/QT policies. Our framework provides guidance to policymakers interested in using new combinations of balance sheet and interest rate policies by highlighting the relevance of the interbank market and financial frictions in the transmission of balance sheet policies.

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Caring for the ‘future’

David Glanville and Arif Merali

Short term interest rate (STIR) futures are the bedrock of interest rate markets, used to price expectations of central bank policy rates and other UK rate derivative markets such as swaps and options (see Figure 1). They are key for the transmission of monetary policy and provide an avenue for interest rate risk hedging which is important for financial stability. Financial market liquidity usually worsens when volatility rises, however liquidity in the UK’s STIR futures during 2022 was especially poor. Liquidity in some metrics such as open interest and volumes has since improved as volatility has reduced, however our extensive market intelligence conversations suggest that many still believe there is further to go when looking ‘under-the-bonnet’ at another key metric, market depth. Volatility continues to play a role, but a reversion to publishing key data releases within market hours may help to build liquidity further.

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Monetary policy in a gas-TANK

Jenny Chan, Sebastian Diz and Derrick Kanngiesser

In recent years, increases in global energy prices have posed significant challenges for net energy importers such as the UK or the euro area. In addition to the inflationary impact, increases in the relative price of energy imply a decline in real incomes for the energy importers. In this blog post, we introduce a macroeconomic model that captures the direct adverse effects on aggregate demand caused by energy price shocks (a notion that resonates with policymakers’ concerns, ie Schnabel (2022), Broadbent (2022), Tenreyro (2022), Lane (2022)). We show how the transmission of energy price shocks differs from other supply shocks, thereby contributing to a better understanding and more effective mitigation of the disruptions caused by energy price shocks.

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What caused the LDI crisis?

Gabor Pinter, Emil Siriwardane and Danny Walker

In September 2022 the interest rate on UK gilts rose by over 100 basis points in four days. These unprecedent market movements are generally attributed to two key factors: the 23 September announcement of expansionary fiscal policy – the so-called ‘mini-budget’ – which was then amplified by forced sales by liability-driven investment funds (LDI funds). We estimate that LDI selling accounted for half of the decline in gilt prices during this period, with fiscal policy likely accounting for the other half. Balance sheet segmentation and operational issues slowed capital injections into LDI funds by well-capitalised pension schemes, leading LDI funds to instead sell gilts. Our analysis shows that these frictions were most pronounced for pooled LDI funds. There are further details in an associated working paper.

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