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- Title
Markets and operations.
- Abstract
The past quarter has been characterised broadly by two distinct episodes. The early part of the review period was essentially a continuation of the volatile conditions observed during much of the summer. And existing worries about slowing global growth were somewhat heightened by the decision of the Federal Open Market Committee (FOMC) in the United States not to tighten policy at its September meeting. Short-term interest rates in both the United States and United Kingdom fell following the September meeting. But, during the latter part of the review period, sentiment improved materially, and US and UK short-term interest rates rose. In large part, the improvement in confidence was due to a reduction in the emphasis on international developments at the October meeting of the FOMC, as well as strong US labour market data. Commentary from the European Central Bank (ECB) - to highlight that the Governing Council was considering options for further monetary policy easing ahead of its December meeting - gave an additional boost to sentiment. Shortly after the data cut-off the ECB announced several measures to loosen policy. In terms of specific UK monetary policy expectations, there was a decline in short-term interest rates following the release of the Inflation Report. Overall, UK short-term interest rates were down slightly over the review period as a whole. Longer-term government bond yields were fairly stable, but there was an increase in the component of yields that compensates for long-term inflation expectations. Meanwhile, there were some large declines in swap spreads - the difference between interest rate swap and government bond yields of equivalent maturity - and in the cross-currency basis swap market. In both cases, these were partly the result of short-term, temporary factors. But contacts reported that structural changes, particularly as a result of an increase in the capital intensity of secured lending and borrowing activity among banks, had also played a role, and some of those factors might be expected to persist. Currency moves were broadly consistent with the direction of changes in relative interest rates in the United Kingdom, United States and euro area. Thus, there was broad appreciation of the US dollar, while the euro fell. Given the relatively large weight of the euro in the sterling exchange rate index, the rise in sterling versus the euro more than offset the decline versus the dollar, leading to an appreciation of sterling overall. There was a modest pickup in sterling-dollar implied volatility, having been quite steady for much of the year. It was unclear whether the change reflected a shift in expectations about the relative paths of monetary policy in the two countries, or some UK-specific risk factor. Early in the review period, most developed equity markets declined slightly, driven by worries around possible spillovers from a slowdown in emerging markets. But improving risk sentiment subsequently resulted in a reversal of those earlier declines, with equities broadly higher overall.
- Subjects
UNITED Kingdom; UNITED States; MARKETS; INTEREST rates; MONETARY policy; UNITED States. Federal Open Market Committee; ECONOMICS
- Publication
Bank of England Quarterly Bulletin, 2015, Vol 55, Issue 4, p370
- ISSN
0005-5166
- Publication type
Article