Bitesize Special: Fascinating Rates and Where to Find them

Changes in Bank Rate and other monetary policy instruments feed through to the real economy by various channels – including the rates of interest for borrowers and savers.  But in practice, there are many of these “interest rates” depending on the type of product, who is borrowing/saving, and on what terms. The Bank has recently published a new range of interest rate statistics that help policymakers, researchers and the general public better understand how policy changes feed through to household and firms in the economy.  Over the next four days, we’ll publish a bitesize post a day highlighting a different interest rate series and thinking about what it might mean for monetary conditions.

How important are interest rates for exchange rates?

Fernando Eguren-Martin and Karen Mayhew.

Many would say that when domestic interest rates rise (relative to abroad) the domestic currency will appreciate. But is it right to think like this? In this blog we use exchange rate theory to inform this discussion and to assess the importance of relative interest rates in accounting for past exchange rate moves. We find that relative interest rates typically move in the same direction as exchange rates but most of the time they account for a small share of exchange rate variation. However, academics might question our use of such a theory as its failure to forecast exchange rates is well documented. We show that this is somewhat unfair, as even if the framework is not very useful in terms of forecasting it is still a useful tool for decomposing past moves in exchange rates.

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UK mortgage rates: born in the USA?

Authors: Gareth Anderson and Matt Roberts-Sklar.

UK mortgage rates play an important role in the transmission mechanism of monetary policy, but are they home-grown? UK swap rates are a key component in determining UK mortgage rates. And UK swap rates are highly correlated with those in the US. Putting these pieces together, we show that UK mortgage rates increase by around 50bp on average in response to a 100bp increase in US swaps. This highlights one important channel through which global financial spillovers affect small open economies such as the UK.

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