Comprehensive MPC rate probability analysis and UK economic insights
The Bank of England's (BoE) Monetary Policy Committee (MPC) meets eight times per year to set the Bank Rate. Rate change probabilities are calculated based on GBP short term interest rate curve, as far as available.
Missing data points are estimated using the Nelson-Siegel-Svensson yield curve model.| Meeting Date | Cut | No Change | Hike |
|---|---|---|---|
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While the empirical probabilities above show what financial markets expect (based on yield curve pricing), the theoretical rate below shows what economic models suggest the BoE should do based on current economic conditions like inflation and growth.
Comparing these helps us understand whether the market expects the BoE to follow economic theory, or if they expect the BoE to take a different path for practical reasons.
The following analysis compares market-implied rate expectations (empirical probabilities derived from SONIA futures) with model-based theoretical rates calculated using the BoE's structural framework. This comparison provides insight into the market's assessment of the BoE's reaction function relative to its historical policy rule.
| Indicator | Current | Target/Neutral | Gap |
|---|---|---|---|
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The theoretical rate is calculated using a Taylor Rule adapted for the eurozone. It considers:
When actual rates are below the theoretical rate, policy is considered "dovish" (supporting growth). When above, it's "hawkish" (fighting inflation).
Model: NAWM-Based Taylor Rule
Specification:
Where: $i_t^*$ = theoretical policy rate, $r^*$ = neutral real rate (~1.0% for UK), $\pi_t$ = current CPI inflation, $\pi^*$ = inflation target (2.0%), $\text{Gap}_t$ = output gap estimate, $\alpha$ = 0.5 (inflation response), $\beta$ = 0.5 (output response)
Note: The BoE's actual COMPASS model is a more sophisticated DSGE framework. This simplified Taylor Rule provides a comparable benchmark consistent with the BoE's reaction function literature. For full model specifications, see the Bank of England Economic Models page.
Empirical Probabilities:
Economic Indicators:
Explore detailed discussion of the BoE's COMPASS model
View Bank of England Economic ModelsValidation: Model outputs are continuously compared against BoE staff projections and consensus forecasts from major institutions (Bloomberg, Reuters surveys).