The Monetary Policy Committee (MPC) is a committee of the Bank England which was set up in 1997 to decide official interest rates in the UK (referred to as the Bank of England Base Rate). The MPC’s primary responsibility is to keep the Consumer Price Index (CPI) close to the Government’s inflation target (2% as of 2011) and, more recently, it also has a responsibility to support growth and employment.
Monetary policy in the UK is usually effected through the rate at which money is lent (the interest rate), but in March 2009 the MPC announced that it would also start injecting money directly into the economy by purchasing financial assets (aka quantitative easing).
The following chart plots the BoE base rate since the MPC was established in 1997 and the FTSE 100 Index. The chart goes to March 2009 – when the base rate was reduced to 0.5% and since when it has not moved.
The MPC meets once a month to set the bank rate. The meetings take place over two days: on the Wednesday and Thursday following the first Monday of each month. This schedule might occasionally be changed, for example in May 2015 the meeting is delayed by 48 hours to avoid clashing with the General Election. The interest rate decision is announced at noon on the second day of the meeting; and the minutes of the meeting are published two weeks later (on the Wednesday of the second week after the meetings take place).
The monthly MPC announcement on interest rates was an important event; the announcement – and the anticipation of the announcement – could move the markets. However, since March 2009 the announcement has generated little interest as the rate has been set at 0.5% with little likelihood of changing in the short-term. This period of abnormally low interest rates should end at some point. In anticipation of this the following briefly analyses the historic behaviour of the UK stock market around the time of the monthly announcements.
The following chart plots the average daily returns of the FTSE 100 Index for the three days around the MPC announcement: the day before the announcement MPC(-1), the day of the announcement MPC(0), and the day following the announcement MPC(+1). For each day, three values are plotted: the average FTSE 100 return for all days (i.e. for all the 144 MPC announcements 1997-2009), the returns on the days for the 18 times the MPC announced an increase in the bank rate, and the returns on the days for the 26 times the MPC announced a decrease in the rate.