The one percentage point rate cut in Australia overnight has increased speculation that major central banks are planning to \u201cshock\u201d markets with large-scale and\/or co-ordinated interest rate action.<\/p>\n
When analysing past interest rate decisions in order to construct the MPC-ometer, I found the MPC had behaved unusually following the 9\/11 terrorist attacks, cutting rates earlier and by more than suggested by economic and financial data. This was counterbalanced by a less dovish stance than warranted by incoming news in later months. I accommodated this behaviour in the model by including a 9\/11 \u201cdummy variable\u201d.<\/p>\n
Escalating financial turmoil in recent days risks damaging economic confidence in a similar way to the 9\/11 attacks, suggesting the MPC will again choose to bring forward easing as insurance against a worst-case scenario.<\/p>\n
In terms of the MPC-ometer, this can be analysed by \u201cswitching on\u201d the 9\/11 dummy variable. Using the model to predict this week\u2019s decision based on the current level of Bank rate, the forecast then changes from a quarter- to a half-point cut. If three-month LIBOR is used instead of Bank rate, a three-quarter point move is predicted. <\/p>\n
If the post-9\/11 period is a guide, however, any shock move this week will represent a shift in the timing of MPC action rather than implying a lower ultimate level of official rates.<\/p>\n
A week ago most economists thought it was too early to cut rates. Now there will be disappointment with a half-point reduction.<\/p>\n","protected":false},"excerpt":{"rendered":"
The one percentage point rate cut in Australia overnight has increased speculation that major central banks are planning to \u201cshock\u201d markets with large-scale and\/or co-ordinated interest rate action. When analysing past interest rate decisions in order to construct the MPC-ometer, I found the MPC had behaved unusually following the 9\/11 terrorist attacks, cutting rates earlier […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2661","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2661","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2661"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2661\/revisions"}],"predecessor-version":[{"id":4970,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2661\/revisions\/4970"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2661"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2661"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2661"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}