Financial markets point to very data-dependent monetary policy

Nades Raviraj and Danny Walker

Big and uncertain shocks have pushed UK inflation above the 2% inflation target over the past few years. How did financial markets view the Monetary Policy Committee’s (MPC’s) monetary policy during this unprecedented period? We show that markets have come to perceive the MPC’s policy stance as increasingly dependent on data releases. In particular, the responsiveness of UK market rates in tight windows around data releases rose significantly from 2022 to 2025. Zooming out to longer time windows in between MPC meetings, the change in services inflation explained a historically large share of the overall change in market rates over the same period.

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Under one roof: housing and inflation expectations

Vedanta Dhamija, Ricardo Nunes and Roshni Tara

Inflation has been widely discussed in recent years, from supermarket aisles to newspapers. But what if what people think inflation is stems not only from grocery prices or energy bills, but from more? Our analysis in Dhamija et al (2026) shows house prices matter in this context, ie housing is salient. Using household surveys for the United States, we find that people tend to overweight their expectations about house prices when thinking about inflation with a coefficient of 25%–45%, significantly above the weight of house prices in the inflation index. Should central banks care about this? The short answer is yes.

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Money talks, broadly speaking

Aaron Clements-Partridge and Ryland Thomas

Broad money aggregates failed policymakers when used as an intermediate target in the 1980s, but they appeared to predict the post-pandemic inflation. Where does that leave their role in setting monetary policy today? That was the topic of a recent workshop hosted by the Bank on ‘Analysing the Information Content of Money’ which brought together academic experts and central bank staff to review the evidence. In this blog we offer our key takeaways from the workshop. We argue that there is value in understanding developments in the broad money data. While it shouldn’t assume special status, money provides an alternative lens through which to assess and communicate medium-term risks to the inflation outlook.

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Monetary policy, state-dependent bank capital requirements and the role of non-bank financial intermediaries

Manuel Gloria and Chiara Punzo

The expansion of non-bank financial institutions (NBFIs) is transforming the financial landscape and introducing fresh challenges for financial stability and oversight at the same time as creating opportunities. Using a dynamic stochastic general equilibrium (DSGE) model, we find that while NBFIs may enhance long-term welfare for households and entrepreneurs in normal conditions, their greater role also heightens vulnerabilities to severe shocks in the financial system. Greater NBFI activity boosts competition in the financial sector, leading to more efficient resource allocation. A working paper detailing these results was recently published.

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A public-private partnership: central banks as a funding backstop

Matthieu Chavaz, David Elliott and Win Monroe

Large-scale provision of long-term funding to banks has become a central bank tool to support credit supply during downturns. However, scholars have worried that allowing banks to rely on public funding could create moral hazard and crowd out private funding. In a recent paper, we address these concerns by showing that central bank and private funding can be complements rather than substitutes. The mere availability of central bank funding improves private wholesale funding conditions, thus supporting lending without central bank funding being used. This ‘equilibrium’ effect makes central bank funding more powerful than previously thought. Finally, the fact that central bank funding comes with strings attached can help to explain why it is an imperfect substitute for private funding.

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Retail investors’ participation in the gilt market

Sarah Munson and Callum Ashworth

In recent years, retail investors’ demand for UK government bonds (gilts) has increased, marking a change in the composition of market participants. The growth of retail investors, comprised of individuals managing their own portfolios, has been a global phenomenon (Foxall et al (2025)). But what’s driving this change, and what does it mean for the gilt market’s role in monetary policy and financial stability? In this post we explore how UK-based retail participants’ presence in the gilt market is changing and what that might signal for the future. We find that retail holdings of gilts remain modest, with positions concentrated in a handful of bonds. This has limited impact on aggregate liquidity indicators but can impact liquidity in these specific bonds.

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How does lower inflation uncertainty affect households’ financial behaviour?

Christoph Herler and Philip Schnattinger

Macroeconomic Environment Theme

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Macroeconomic Environment Theme which focuses on the changing infaton dynamics and unfolding structural change faced by monetary policy makers

The recent inflation surge has sparked concerns about how uncertainty over price dynamics shapes households’ financial behaviour. Often, lower uncertainty about inflation coincides with lower expected inflation – when inflation is low and stable, households feel more confident about future trends. In a new paper, Johannes J. Fischer, Christoph Herler and Philip Schnattinger employ a randomised controlled trial (RCT) to disentangle the effects of households’ uncertainty about inflation from the expected level. This disentangling is important: lower expected inflation can discourage immediate spending, while lower inflation uncertainty may push them towards spending more. We show that reduced inflation uncertainty leads to higher planned spending, lower saving rates, and a shift towards liquid assets with fixed returns.

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GIV us some credit: estimating the macroeconomic effects of credit supply shocks

Sam Christie and Aniruddha Rajan

Sudden contractions in credit supply can trigger and amplify recessions – a reality made painfully clear by the 2008 global financial crisis (GFC). However, quantifying these real economic effects is challenging. In this post, we demonstrate a novel way to do so using Granular Instrumental Variables (GIV), focusing on the UK mortgage market. The core idea is that we can exploit the market’s concentration to build up exogenous fluctuations in aggregate credit supply from idiosyncratic lender-specific shocks. Using our GIV, we find evidence that contractionary mortgage supply shocks can have quantitatively significant effects on the macroeconomy, causing persistent decreases in output, consumption, and investment, alongside increases in unemployment.

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Fossicking in the dark or twenty-twenty foresight?

Rishi Khiroya and Lydia Henning

If you asked people what skill they would most love to have, you might receive answers like ‘to fly’, ‘to be invisible’ or even ‘predicting the future’. If you asked people who worked in financial markets in particular, ‘accurately predicting the future’ would probably be top of the list. From economic trends to political shifts, market participants have a stake in anticipating what comes next. We use data collected from the Bank’s Market Participants Survey (MaPS) to see how market predictions have tended to compare with what subsequently unfolds over the period of high uncertainty and volatility that has been observed in the wake of the pandemic – and how predictive accuracy has varied depending on the time horizon in question.

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The Bank of England’s statutory monetary policy objectives: a historical and legal account

Michael Salib and Mesha Ghazaleh

The Bank’s monetary policy objectives are some of the most significant objectives bestowed by Parliament on any UK public authority. They are to maintain price stability and, subject to that, support the Government’s economic policy, including its objectives for growth and employment. In our paper we offer a historical and legal account of the Bank’s monetary policy objectives by looking at their origins, the parliamentary debates around their wording and their interpretation in practice. Since being introduced in 1998, our paper finds that they have proved remarkably resilient in directing the Bank’s monetary response over the past 25 years, partly due to the in-built flexibility in their wording.

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