International Journal of Finance & Economics· 2026Q2
The Effects of Monetary Policy in the United Kingdom: New Evidence From SONIA Market Responses
- 0citations
- Q2SCImago
- 2026year
Short summary
A new UK monetary policy instrument (MPI) using SONIA market responses shows a 100-basis-point Bank Rate hike reduces GDP growth by 0.4pp, raises unemployment by 0.2pp, and cuts inflation by 0.2pp.
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Key points
- A new UK monetary policy instrument (MPI) was constructed using daily SONIA changes around Bank of England policy events.
- A 100-basis-point contractionary monetary policy shock reduces real GDP growth by 0.4pp.
- The same shock increases unemployment by 0.2pp and consumer price inflation by 0.2pp.
- Equity prices fall by a peak of 2% after one year, with delayed impacts on credit and house prices.
AI-generated from the title and abstract; the full text is not read.
Abstract
ABSTRACT This paper constructs a new measure of the UK monetary policy instrument (MPI) using daily changes in the sterling overnight index average (SONIA) around Bank of England policy events from June 1997 to August 2025. The instrument explicitly accounts for pre‐event information and unconventional monetary policy (UMP) using lagged macro‐financial factors and a shadow rate‐based measure of unconventional policy. We use the instrument in a monthly structural vector autoregression (VAR) to estimate the effects of UK monetary policy shocks. Following a contractionary shock normalised to a 100‐basis‐point increase in the Bank Rate, real GDP growth falls by about 0.4 percentage points, unemployment rises by around 0.2 percentage points, and consumer price inflation declines by about 0.2 percentage points. Equity prices fall sharply, with a peak response of about 2% after 1 year. Sterling initially appreciates but subsequently depreciates, while private credit and house prices decline with a delay. The estimated responses are qualitatively similar across the full and pre‐pandemic samples, alternative policy‐event sets, alternative treatments of potential confounders, and local‐projection estimates. They also broadly accord with responses obtained using established high‐frequency measures of UK monetary policy surprises.
The authors' abstract, as published at the source. International Journal of Finance & Economics, 2026 · DOI ↗
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General Economics, Econometrics and FinanceEconomics, Econometrics and Finance