From trading floors to policy calls: the value and evolution of our interactions with financial markets − speech by Andrea Rosen

Speech

Good morning, and thanks for the opportunity to speak at this very timely conference.

I joined the Bank of England in 2020 after many years working in financial markets. My time at the Bank has not been calm. But it has been fascinating, and I have been lucky enough to experience it from a unique vantage point – first as Head of Market Intelligence and Analysis, then as Head of Sterling Markets, and now as Director of Markets.

Having been on both sides, I have some perspective on the symbiotic relationship between financial markets and policymaking. Markets take all available information at a given time, overlay their perception of the policy reaction function, and reflect that in asset prices. Policymakers then take market pricing and expectations as an input into their deliberations. They rely on markets as a key transmission mechanism for their decisions into the real economy and try not to insert unnecessary volatility into that process through clear and careful communications. Both markets and policymakers try to anticipate each other’s moves as new information emerges. The ideal situation is one where the market understands policymakers…and policymakers can rely on the information value of market pricing. Of course, the reality tends to be much more complicated than that.

An important job for the Markets area of the Bank is to ensure that the relevant decisions and actions taken across our monetary policy and financial stability remits are up to date on market conditions and expectations, as well as grounded by our analysis, judgement and experience operating in financial markets. The Bank and its Committees may not always deliver what financial markets want or expect but having the context to make informed decisions matters.

As I explained in 2022, the Bank’s market intelligence function is a key component of that effort, combining our qualitative assessment based on a broad network of relationships with market participants, with market data, models and surveys.

But the Bank’s interaction with financial markets goes much further and positions us well for interpreting what is happening in the world around us. We implement monetary policy and provide liquidity insurance to the financial system through our balance sheet; administer the UK’s risk-free rate; and act as an investor and agent in global rates and FX through our reserves management function. All while ensuring that our balance sheet remains protected from undue financial risk.

The Bank’s extensive presence in financial markets means that we are well placed to provide regular, informed and timely judgements to the Monetary Policy Committee (MPC). Those efforts will continue. We also see value in MPC members periodically engaging directly with market participants in a systematic, structured and transparent manner, mirroring the approach that our central bank peers have in place.

In this context, and as part of the Monetary Policy Transformation Programme that we are discussing at this conference, I am here to announce a new initiative: the Bank of England Market Participants Group (MPG).

This will be a senior-level forum for financial market participants to directly share their views with MPC members in a roundtable setting. It will meet three to four times a year and draw on experts across UK and global markets, to cover topics relevant to the UK economy and monetary policy making process. MPG members will be selected through an application process, and the minutes and agenda of each meeting will be available to the broader market and public, ensuring transparency. We will also continue speaking with a diverse set of market participants through our market intelligence function and relaying that information to the MPC on a regular basis.

Before I expand on the MPG, let me build on how the Bank already interacts with, and learns from, financial markets to shape and deliver effective policy making.

Markets at the Bank of England

Achieving monetary and financial stability in a more shock-prone world requires clarity. We have had our fair share of shocks over the past few years. And amidst a rapidly evolving and uncertain global environment, our ability to understand, monitor and analyse market developments and structure - as well as to operate and communicate effectively in financial markets - has become even more crucial.

The Bank's integrated approach to market intelligence, policy design, and operations means that we can consistently interact with - and learn from markets - which then informs our policy work and advice (Figure 1).

Figure 1: The Bank of England’s Markets Directorate

Our approach to market intelligence and analysis goes beyond simply monitoring asset prices — it involves staying on top of global market narratives and sentiment, testing prevailing views against empirical evidence, considering market liquidity and functioning, and placing UK developments within an international and cross-asset framework (Figure 2).^{footnote [1]}

Financial markets are, at heart, stories we tell about the future, priced in the present. Regularly speaking with a wide range of people across markets is therefore hugely important. It adds qualitative interpretations and nuance that might not be obvious from publicly available data alone, and it helps us stay one step ahead on key themes. We deliberately seek out a range of views from a diverse set of contacts,^{footnote [2]} and aim to present an aggregate picture of market narratives at any given time, informed by our staff’s judgement and experience.

We are grateful to everyone who speaks with us in this context: from buy- and sell-side traders, strategists and economists, to bank and building society Treasurers, to industry bodies, to the UK Money Markets Committee and the London Foreign Exchange Joint Standing Committee, which we chair.

Figure 2: Our Market Intelligence and Analysis function

The UK is a relatively small open economy with a large financial sector, and our core markets are highly interconnected with the rest of the world. Therefore, as well as continuous engagement with global market participants, we are in close contact with our official sector peers on both conjunctural and structural market themes. We do this bilaterally at all levels, and through multilateral fora including the BIS Markets Committee and the Global Foreign Exchange Committee.

There is also tremendous value in challenging or supporting what we hear from markets with what we see in markets. In that context, we regularly use trade-level data to look for signals about how liquidity is making its way through the financial system,^{footnote [3]} how positioning is impacting market pricing, how markets are functioning in volatile times, and other important questions (see Figure 3 for some examples of our use of transactions data). Of course, the data tell us about things as they are, not as they will be. They also don’t tell us much about the ‘why’. So, it is always important to use our market experience and intelligence to complement our dashboards, to test what we see and interpret what it may mean.

Figure 3: Examples of our use of market transactions data

At any given point, the Bank isn’t just observing what is happening in markets. We are actively participating in them, mainly through our sterling and FX balance sheet operations, as well as our role managing the UK’s foreign exchange reserves on behalf of the Government.

Our Sterling Markets Division (SMD) is, in a way, what makes the Bank of England a bank. Indeed, as Lord Cobbold, former Governor of the Bank of England, is reputed once to have said, ‘A central bank is a bank, not a study group’.^{footnote [4]} The Markets area is responsible for operations relating to the Bank’s sterling balance sheet, which peaked at over £1 trillion in 2022, and at present stands at over £750 billion.^{footnote [5]}

The balance sheet is used to implement the MPC’s policy decisions. We provide bilateral and market-wide liquidity facilities as part of the Sterling Monetary Framework (SMF) and lead on the Bank balance sheet’s transition into a new operating framework – a repo-led, demand-driven system for supplying central bank reserves.

All of our standing SMF facilities are ‘open for business’ – as you’d expect from a bank – and should be used by eligible firms for liquidity management. We have also recently expanded our liquidity facilities through the development of the Contingent Non-Bank Financial Institution Repo Facility (CNRF).

Finally, our management of the balance sheet includes advising on the MPC’s Quantitative Tightening (QT) strategy, as well as implementing QT decisions through the design and execution of the sales operations. The QT annual review process for 2025/26 is underway, and we look forward to continuing to engage with market participants in this context.

We learn a lot about market conditions and plumbing through our facilities and operations, which helps inform both policy design and advice across our various remits. We also remain humble about what we know and may not know and are closely monitoring financial markets signals and feedback, particularly during this period of balance sheet transition.

If our Sterling Markets Division is a bank, then our Foreign Exchange Division (FED) effectively runs like an asset manager. We are responsible for managing the UK’s $203 billion^{footnote [6]} of official gold and foreign currency reserves on behalf of His Majesty’s Treasury, through the Exchange Equalisation Account (EEA). The primary aim is to ensure the EEA can meet its policy objectives of enabling payments abroad, meeting the UK’s IMF obligations and managing any undue fluctuations in sterling.

We also run the Bank’s own $38 billion pool of FX reserves; carry out wholesale foreign currency transactions on behalf of government departments; provide treasury solutions to other central banks, across many currencies; and we are an active issuer in global Commercial Paper and bond markets.

Strict information segregation is kept between our policy and trading operations, but our presence in markets provides us with important first-hand information about global rates and FX market liquidity, funding and trading conditions in real time. This can be very valuable, particularly in periods of market volatility or stress.

How Market Intelligence feeds into our Policy Committees

So how does our understanding of financial markets, and particularly our market intelligence (MI) gathering, feed into our policy committee deliberations?

Our MI and analysis are an important input into the Financial Policy Committee’s (FPC’s) work to identify, monitor and address systemic risks to UK financial stability. Here the focus is less about understanding market expectations of policy decisions or communications. It is more about identifying and monitoring structural changes and vulnerabilities in the financial system better, particularly in areas where data are less readily available, or where activities are taking place outside the regulatory perimeter (Figure 4).

For example, MI has helped the FPC better understand both the benefits and vulnerabilities of market-based finance – as highlighted by the Governor in a recent speech. Last year’s system-wide exploratory scenario (SWES), an innovative way of working collaboratively with market participants to strengthen the Bank’s surveillance and scenario capability, also benefited from MI. We are actively monitoring structural changes in the UK rates market and what implications that may have. This includes identifying possible reforms to market structure to enhance gilt repo market resilience. And we are working closely with colleagues in our Financial Stability area on questions around how current global uncertainty and changes in market correlations can feed through to systemic vulnerabilities.

Our MI framework really shows its worth when we need to understand and react to market dynamics quickly in periods of financial stress and/or volatility. In fact, MI – coupled with our highly experienced staff’s judgements about market conditions and implications – have informed discussions and decisions by our Governors and policy committees many times over the past few years, not least during the 2022 financial stability intervention following the LDI stress.^{footnote [7]}

Figure 4: How does the Markets Directorate support the FPC

Our market presence and expertise has fed substantially into the monetary policy process too (Figure 5).

MI is one of many inputs that the MPC considers in its policy deliberations. It fits into our broader response to Dr Ben Bernanke’s review. As the Governor set out in a recent speech, the direction of travel for our monetary policy communication is to move away from communicating through one central projection that reflects the ‘best collective judgement’ of the MPC, and towards explaining how risks, scenarios, and a wider range of analysis inform the policy choice.

Staff-led MI supports this process by overlaying traditional data and models with valuable qualitative insights. Specifically, it helps us decipher the signals markets may be sending us about the outlook, expectations, and the impact of asset prices and financial conditions on the real economy. We also advise colleagues on how communications may be interpreted by market participants.

We have dedicated teams covering developments in UK rates markets and monetary policy expectations. They speak with market participants on a regular basis, to get their views on the economy and test whether the MPC’s reaction function is well understood This is supplemented by the Market Participants Survey (MaPS), which is used to provide a time series of quantitative, repeatable and highly representative aggregated MI from participants in UK rates markets to the MPC.

My colleagues and I brief the Committee regularly on what we hear and see, on an aggregated basis and considering many points of view. We provide our informed judgements and analysis on what this may mean for policy decisions and communications. This is – crucially – not because the MPC should mechanically follow what markets expect. Rather because understanding it forms part of the inputs necessary for the Committee’s decisions. Market expectations of the future path of Bank Rate affects the longer-term interest rates that UK households and firms face, as well as the prices of other UK assets, the level of economic activity, and, ultimately, inflation. The signals and feedback we get from financial markets can also bring an interesting – and valuable – layer of challenge to the MPC’s own assessments about the UK’s outlook and global context.

Figure 5: How does the Markets Directorate support the MPC

We are continually seeking to enhance our market intelligence capabilities to ensure they provide even stronger support for monetary policy and the decisions of the MPC.

Introducing the new Market Participants Group

It is in that spirt that we are creating the Market Participants Group (MPG).

There are three main objectives of the MPG.

First, to enable MPC members to hear directly from market participants on a regular basis, aligning the Bank with international peers who have similar groups (such as the European Central Bank and Federal Reserve Bank of New York). Our staff-led MI provides policymakers with regular synthesised summaries of our MI conversations and quantitative analysis. This will remain the primary source of market-related information for the MPC.

Second, to support the Monetary Policy Transformation Programme we are undertaking and discussing at this conference. As set out in Clare Lombardelli’s speech last year, a culture of ‘continuous learning’ is a cornerstone of our response to Dr Bernanke’s review. We recognise that effective policymaking doesn’t happen in isolation. It requires us to look outward, to engage with experts and draw on the wealth of knowledge that exists beyond the walls of the Bank.

Third, to provide a structured and transparent framework for MPC members’ direct interaction with market contacts. This interaction will ensure that all MPC members have access to the same information and views at the same time. MPC members will ask questions but will be in listening mode, without communicating any information that is not already in the public domain, including about their own policy stance. Minutes of these meetings will be published so that the information will be available to all.

Shortly after this speech, we will be opening the applications process. We will select a pool of up to 16 MPG market participant members, from both buy- and sell-side firms to deliver sufficiently broad coverage across firm type and individual expertise. Members will be senior contacts from large and active firms in UK and global markets, with a broad and deep financial market expertise. Membership is conferred on individuals not institutions, but we will keep institutions in mind when looking at overall membership. Aligned with our Meeting Varied People strategy, we will be looking to appoint members of the MPG from diverse backgrounds to represent diversity of thought in the views we collect. Half of the selected members will be rotated every two years, with the remainder providing continuity to the group. The list of MPG members will be published on our website. And we will continue to regularly engage with a broad swathe of market participants through our staff-led MI function.

I would strongly encourage people in relevant roles to apply and be a part of this landmark way for the MPC to engage externally. Selection criteria and the application form are available on the Bank’s website. Applications will open from today until 25 July. We will announce the first cohort of MPG members in Q3.

The first MPG meeting will take place in November. We will also review the MPG approach over time and may want to make changes as we see how it operates in practice.

Table A: The Market Participants Group (MPG)

Conclusion

To conclude, a reflection: when I was moving to the Bank, someone told me that it might be easier to help make policy than to try to forecast it. After helping our Committees and Executive navigate a global pandemic, an energy shock, a financial stability intervention, bank failures, a trade shock, a monetary policy tightening cycle and a loosening cycle, all amidst persistent uncertainty and market volatility – I’m not quite so sure.

What I am sure of is the importance of our policymakers and markets understanding each other as best as possible, as they both anticipate each other’s reaction functions, particularly in uncertain times. This symbiotic relationship requires, above all, open lines of communication.

Looking ahead, the new Market Participants Group will become an important forum for the MPC to hear directly from those at the forefront of financial markets, to complement the significant market context that they already get from staff. It will be a key feature of our enhanced approach to policymaking, ensuring a robust framework around the MPC’s engagement with external participants.

I would like, once again, to strongly encourage those in relevant roles to apply, and look forward to putting this exciting innovation into practice over the coming months.

I would like to thank Geoff Coppins, Bianca Ginelli Nardi, Sarah Illingworth, Manon Laffly and Charlotte McEwan for their help in drafting this speech, and Andrew Bailey, Sarah Breeden, Iain de Weymarn, Michael Foster, Sumita Ghosh, Mike Goldby, Tom Jennings, Phillipe Lintern, Clare Lombardelli, Catherine Mann, Arif Merali, Huw Pill, John Power, Dave Ramsden, Matt Roberts-Sklar, Victoria Saporta, and Tom Smith for their helpful comments and suggestions.