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Bank of England Interest Rate Announcements and the Foreign Exchange Market ∗

The Basel paper on interest rate risk divides the responsibilities for interest rate risk management and oversight among the supreme management body and senior management. In the context of Austrian corporate law, the senior management would be the directors of a credit institution authorized to manage and legally represent it under Article 2 No 1 of the Austrian Banking Act. The supreme management body of Austrian corporations would be the supervisory board, whose core function is to oversee the directors in order to ensure that the latter are fulfi lling their responsibilities. In Austrian companies, senior management is. | Bank of England Interest Rate Announcements and the Foreign Exchange Market Michael Melvin a Christian Saborowski b c Michael Sager c e and Mark P. Taylord f aBlackRock bWorld Bank cDepartment of Economics University of Warwick dWarwick Business School eWellington Management f Centre for Economic Policy Research Since 1997 the Bank of England Monetary Policy Committee MPC has met monthly to set the UK policy interest rate. Using a Markov-switching framework that incorporates endogenous transition probabilities we examine intraday five-minute return data for evidence of systematic patterns in exchange rate movements on MPC policy announcement days. We find evidence for non-linear regime switching between a high-volatility informed trading state and a low-volatility liquidity trading state. MPC surprise announcements are shown to significantly affect the probability that the market enters and remains within the informed trading regime with some limited evidence of market positioning just prior to the announcement. JEL Codes E42 E44 F31. 1. Introduction The Bank of England BoE was granted operational independence to set its key interest rate in May 1997 with the goal of implementing We are grateful to two anonymous referees for helpful and constructive comments on an earlier draft of this paper the editor Frank Smets Charles Goodhart Richard Meese Carol Osler and seminar participants at the London School of Economics the University of Warwick and the 2008 Global Conference on Business and Finance held in San Jose Costa Rica. Responsibility for any remaining omissions or errors remains with the authors. Christian Saborowski acknowledges financial support from the European Commission Marie Curie Fellowships. Corresponding author Taylor mark.taylor@wbs.ac.uk. 211 212 International Journal of Central Banking September 2010 policy consistent with stable inflation and economic growth.1 Interest rate decisions are made by the Bank s Monetary Policy Committee MPC which meets