tailieunhanh - Inferring market interest rate expectations from money market rates

Results for more recent periods show a much weaker relationship between target rate changes and other interest rates. For example, in applying the Cook and Hahn event-study approach to the 1987–1995 period, Roley and Sellon (1995) found that the bond rate rose a statistically insignificant four basis points for each percentage point change in the target funds rate. (They did, however, find some evidence that policy moves were anticipated in the latter period.) Similarly weak results for the 1989–1992 period were obtained by Radecki and Reinhart (1994) | Inferring market interest rate expectations from money market rates By Martin Brooke of the Bank s Gilt-edged and Money Markets Division and Neil Cooper and Cedric Scholtes of the Bank s Monetary Instruments and Markets Division. The Bank s Monetary Policy Committee is interested in market expectations of future interest rates. Short-term interest rate expectations can be inferred from a wide range of money market instruments. But the existence of term premia and differences in the credit quality maturity liquidity and contract specifications of alternative instruments means that we have to be careful when interpreting derived forward rates as indicators of the Bank s repo rate. This article discusses the differences between some of the available instruments and relates these to the interest rate expectations that are calculated from them. It also describes the Bank s current approach to inferring rate expectations from these instruments. Introduction The Bank s Monetary Policy Committee MPC is interested in financial market participants expectations of future interest rates. Knowledge of such expectations helps the MPC to predict whether a particular policy decision is likely to surprise market participants and what their short-term response is likely to be to a given decision. Expectations of future levels of official rates also play a key role in determining the current stance of monetary policy. The Bank implements the MPC s monetary policy decisions by changing the level of its two-week repo rate which in turn influences the levels of other short-term money market interest rates. However many agents in the economy are also affected by changes in longer-term interest rates. For instance five-year fixed-rate mortgages are typically priced off the prevailing rates available on five-year swap contracts and larger firms often raise finance in the capital markets by issuing long-maturity bonds. Changes in these longer-term interest rates depend to a considerable .