Which curve is used to derive the market expectations of the Banks policy rate published in the Inflation Report?
The projections for CPI inflation and GDP growth published in the Inflation Report are conditioned on a benchmark path for Bank Rate over the future. This assumes that Bank Rate follows a path implied by a yield curve calculated from certain financial market instruments. An explanation of how the MPC derived the conditioning paths for previous Inflation Report projections can be found here. Why is there no short-end information for the government curve prior to March 1997? The market for generalised collateral (GC) repo agreements began in January 1996. GC repos became a more satisfactory indicator of expectations of future interest rates after March 1997, when the Bank began conducting its Open Market Operations using gilt repos. Prior to this date the only available short maturity assets we could use would be Treasury bills, which do not have an active secondary market and the prices of which are affected by banks’ liquidity requirements.
