As those of you who have been in Hong Kong recently will know, this has been a very stormy summer from a meteorological point of view: we have just had the worst typhoon in sixteen years and the wettest typhoon since records began more than a hundred years ago. 1  BIS Review 103/1999  Economically, the most recent figures suggest that our wet and windy summer has brought with it a distinct turn for the better.
This thinking lay behind the Committee’s decision to issue a statement after its July meeting that the recent upward movement at the near end of the yield curve was “unwarranted”. More generally, the explicit guidance provided in August should also serve to emphasise that UK monetary policy decisions are taken with reference to the domestic outlook and will only be influenced by developments elsewhere in so far as they affect that outlook. There is mixed evidence thus far on whether guidance has helped to de-couple movements in UK short-term rates from those overseas. The prime exhibit against this having happened is the high degree of correlation between UK and US interest rates at the time of the FOMC’s unexpected decision at its meeting on 17/18 September not to begin to taper its asset purchases. As far as market participants were concerned, this was surely primarily news about the FOMC’s policy reaction function, not about the US economic outlook. So it ought also to have had little impact on UK interest rates. As Chart 7 shows, however, the movement in UK one-year interest rates two years ahead was almost as large as for the corresponding US series. That, together with the high co-movement prior to the September FOMC meeting when US interest rates rose, suggests that market participants may have not yet grasped the extent to which decisions over the level of Bank Rate will be driven by the domestic outlook. There is, however, other evidence which suggests that some de-coupling may have taken place.