Asymmetries in Bank of England monetary policy

Abstract

This article estimates limited dependent variable models for Bank of England monetary policy using monthly data over the period June 1997–March 2003. During this period the Bank had operational independence to set the interest rate in order to meet the inflation target set by the government. The study finds evidence that the Bank has responded to current output growth rather than inflation, which is consistent with targeting future inflation when there is a lag in the response of inflation to the output gap. It also finds evidence of an asymmetry in the sense that the link between the interest rate and output growth is stronger when an increase in the interest rate is required than when circumstances dictate it should be cut. On the other hand there is considerably more inertia for interest rate cuts, in the sense that a cut in the rate in one month significantly increases the probability of a cut in the next month which is not the case for increases.