To the lower bound and back: measuring UK monetary conditions

Natalie Burr, Julian Reynolds and Mike Joyce

Monetary policymakers have a number of tools they can use to influence monetary conditions, in order to maintain price stability. While central banks typically favour short-term policy rates as their primary instrument, when policy rates remained constrained at near-zero levels following the global financial crisis (GFC), many central banks – including the Bank of England – turned to unconventional policies to further ease monetary conditions. How can the combined effect of these policies be measured? This post presents one possible metric – a Monetary Conditions Index – that uses a data-driven approach to summarise information from a range of variables related to the conduct of UK monetary policy. We discuss what this implies about how UK monetary conditions have evolved since the GFC.

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Beyond the average: patterns in UK price data at the micro level

Lennart Brandt, Natalie Burr and Krisztian Gado

The Bank of England has a 2% annual inflation rate target in the ONS’ consumer prices index. But looking at its 700 item categories, we find that very few prices ever change by 2%. In fact, on a month-on-month basis, only about one fifth of prices change at all. Instead, we observe what economists call ‘sticky prices’: the price of an item will remain fixed for an extended amount of time and then adjust in one large step. We document the time-varying nature of stickiness by looking at the share of price changes and their distribution in the UK microdata. We find a visible discontinuity in price-setting in the first quarter of 2022, which has only partially unwound.

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Is UK monetary policy driving private housing rents?

Daniel Albuquerque and Jamie Lenney

Rent prices have risen by 9% on average in England since the Bank of England’s Monetary Policy Committee (MPC) started raising interest rates in December 2021. Alongside this rise in prices has been a widening in the gap between reported supply and demand in the rental sector, with tenant demand continuing to rise in 2023 amidst falling supply (RICS survey). Is monetary policy causing the rise in rents? In this post, we provide evidence that temporary increases in interest rates are ultimately associated with a decrease in rental prices that follows an initial, but relatively short lived, increase in rental prices and tenant demand. These results also hold across regions in England.

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Decoding the market for inflation risk

Saleem Bahaj, Robert Czech, Sitong Ding and Ricardo Reis

Few topics captivate our attention like the enigma of inflation. Understanding where the market thinks inflation is headed is crucial for policymakers, investors, and anyone who wants to keep their financial ducks in a row. And that’s where inflation swaps come into play. They are like the crystal ball of inflation expectations, allowing traders to hedge against inflation risk and giving us a peek into the minds of market participants. In a recent paper, we delve into this thriving market to uncover the who, what, and why behind the prices of these swaps to shed light on the dynamics of inflation expectations.

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Tradable cost shocks and non-tradable inflation: real wages and spillovers

Ambrogio Cesa-Bianchi, Federico Di Pace, Aydan Dogan and Alex Haberis

The recent steep rise in energy prices led to a rise in the price of energy-intensive tradable goods, with inflationary pressures subsequently broadening into services in many economies. Because services are less traded and have little energy input some have suggested this broadening might indicate inflationary pressures becoming more persistent. In this post, we explore the issue through the lens of a stylised two-country model with a tradable and a non-tradable sector. It suggests that following an energy price shock: i) the broadening of inflation from goods to services need not imply more persistent inflationary pressure or changed longer-run expectations, but may reflect one-off adjustments via domestic labour markets; and ii) Inflationary pressures in non-tradable sectors can still have sizable international spillovers.

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Time-varying disagreement and monetary transmission

Vania Esady

In macroeconomic models, economic agents are often assumed to perfectly observe the current state, but in reality they have to infer current conditions (nowcast). Because of information costs, this is not always easy. Information costs are not observable in the data but they can be proxied. A good proxy is disagreement on a near-term forecast because significant disagreement indicates that it is difficult to observe current economic conditions – ie higher information frictions. If the ability to nowcast varies over time, this may affect agents’ ability to respond to various shocks, including monetary policy shocks. My recent paper shows that when disagreement is higher, contractionary monetary policy brings down inflation, at the cost of a greater fall in economic activity.

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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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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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Sluggish deposit rates and the effects of monetary policy

Alberto Polo

Could the slow response of deposit rates to changes in monetary policy strengthen its impact on the economy? At first look, the answer would probably be ‘no’. Imperfect pass-through of policy to deposit rates means that the rates on a portion of assets in the economy respond by less than they could. But what if this meant that the rates on other assets responded by more? In a recent paper, I develop a model that is consistent with a number of features of banks’ assets and liabilities and find that monetary policy has a larger effect on economic activity and inflation if the pass-through of policy to deposit rates is partial.

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The macroprudential toolkit: effectiveness and interactions

Stephen Millard, Margarita Rubio and Alexandra Varadi

The 2008 global financial crisis showed the need for effective macroprudential policy. But what tools should macroprudential policy makers use and how effective are they? We examined these questions in in a recent staff working paper. We introduced different macroprudential tools into a dynamic stochastic general equilibrium (DSGE) model of the UK economy and compared their impact on the economy and household welfare, as well as their interaction with each other and with monetary policy. We found that capital requirements reduce the effects of financial shocks. Instead, a limit on how much of borrowers’ income is spent on mortgage interest payments reduces the volatility of lending, output and inflation resulting from housing market shocks.

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