Nades Raviraj and Danny Walker
Big and uncertain shocks have pushed UK inflation above the 2% inflation target over the past few years. How did financial markets view the Monetary Policy Committee’s (MPC’s) monetary policy during this unprecedented period? We show that markets have come to perceive the MPC’s policy stance as increasingly dependent on data releases. In particular, the responsiveness of UK market rates in tight windows around data releases rose significantly from 2022 to 2025. Zooming out to longer time windows in between MPC meetings, the change in services inflation explained a historically large share of the overall change in market rates over the same period.
UK interest rates have recently had to respond to big shocks.
The MPC has had to respond to very large shocks in recent years. It routinely considers a wide range of inputs – including data, analysis, forecasts and scenarios – when deciding its strategy and policy stance at each meeting. In its communications it has often pointed to specific data sources (for example, in the August 2023 minutes). Financial markets are important because they play a key role in transmitting monetary policy to the economy. So which inputs do financial markets appear to think the MPC cares about most? And how data dependent do they think policy has been in practice?
Interest rates have become more responsive to UK inflation data releases.
To analyse the data dependence of UK monetary policy as perceived by markets, we use high-frequency data to look at how short-term market interest rates respond in tight windows around UK inflation data releases, over the period 2012 to early 2026. The size of this response signals how strongly markets expect the MPC to react to domestic inflation news (refer to Healy and Jia (2024) and Mangiante et al (2025) for similar methods).
We find that the estimated responsiveness of market rates to inflation data has risen significantly in the UK since 2022. The estimated responsiveness to inflation data has risen by more than for GDP, PMI or labour market data. A 10 basis point surprise in UK inflation data releases was associated with a 3 basis point change on impact in three-year swap rates on average over the three years to 2025, compared to close to no change in the three years to 2022 (Chart 1). This points to greater importance of inflation data in market participants’ perceptions of the MPC’s reaction function, consistent with the idea that policy itself has become more data dependent.
Chart 1: Market rates have become more responsive to data surprises in narrow windows around UK inflation data releases since 2022
Note: Chart shows coefficient estimates from a set of rolling three-year regressions of the high-frequency change in three-year swap rates in 10-minute windows surrounding UK data releases on the total surprise in the data release.
We test whether market perceptions of higher data dependence also show up over longer time windows between consecutive MPC meetings.
We next assess whether perceptions of heightened market rate responsiveness to inflation data only affect market rates the day the data is released or whether those perceptions appear to be reflected over longer time periods. This is important because short-term changes in market rates that then dissipate quickly have smaller impacts on the economy than changes in rates that persist over time.
Specifically, we widen the window to measure the change in market interest rates from market close on the day of each MPC meeting to the next. This is a simple proxy for markets’ perception of the change in policy stance between MPC meetings. We then analyse how this change in market rates correlates with the macroeconomic data that is released between meetings (a simpler version of Orphanides (2001)). We compare how well different data – such as inflation (both outturns and short‑term forecasts), wage growth, employment and PMIs – explain movements in market rates.
This exercise has limitations. We add controls for other changes in macroeconomic data but these controls will not capture all possible drivers of market rates in these time windows. The results should therefore be interpreted as suggestive rather than definitive.
Markets have come to view services inflation data as a key determinant of the policy stance.
We find that services inflation – specifically the change in the annual service inflation rate between MPC meetings – was the most important variable in explaining UK market rates from the end of 2021 to 2025. A 10 basis point change in annual services inflation between MPC meetings was associated with around a 6 basis point change in the three-year swap rate over the three years to late 2025 (Chart 2). The change in services inflation explained 35% of the variation in market rates over that period. This represents a clear break from the past: before the recent cycle, the link between services inflation and market rates was much weaker. Over the three years to 2019 for example, the change in services inflation explained roughly 5% of the variation in market rates – which was a period when services inflation was much lower than post 2022.
Chart 2: Market rates have been strongly correlated with the change in UK services inflation between MPC meetings since 2022
Note: Chart shows coefficient estimates from a set of rolling three-year regressions of three-year swap rate on changes in services inflation using data summarised in windows between MPC meetings. Shaded area is 95% confidence interval.
This finding is robust to the inclusion of a set of other macroeconomic variables as controls, such as headline inflation, the unemployment rate and PMIs. Including the unemployment rate alongside services inflation improves the fit but only slightly. Even including the US one-year swap rate in the same regression – which on its own explains around 60% of the variation in UK rates, given the well-documented close relationship between the two – only slightly reduces the importance of UK services inflation in explaining UK rates.
Our findings might point to a broader international trend towards stronger data responsiveness of market rates. Our analysis suggests that a similar, albeit less strong, relationship also held in the US until recently.
It isn’t obvious that monetary policy should be equally data dependent at all times.
At first glance, it might seem obvious that monetary policy should always be data dependent, and that that financial markets should incorporate this throughout. But that isn’t necessarily the case. Our estimates suggest market perceptions of the MPC’s data dependence were much lower before 2022. And this has some theoretical underpinning. Market responses may reflect that, if a monetary policy maker broadly understands the shocks hitting the economy, and monetary policy can only affect the economy with some lag, the policymaker should respond to the future economic outlook rather than data releases, which are backward-looking. Of course, data releases will often contain some signal about the outlook, but the strength of that signal will vary over time. At a time when big and uncertain shocks are hitting and certainty about the outlook is low, it may make sense to place more weight directly on the data (Bailey (2025) and Haberis et al (2025)).
What happens next?
Markets have perceived the MPC as being very data dependent over recent years. This represents a big change compared to the period before the Covid pandemic. This raises an important question: what will markets look at to determine the UK policy stance going forward? Placing greater weight on real‑time data may be a sensible response to the heightened uncertainty of recent years. That uncertainty does not appear to be going away any time soon, so perhaps the perceived data dependence of monetary policy is here to stay.
Nades Raviraj and Danny Walker work in the Bank’s Monetary and Financial Conditions Division.
If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.
Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.
Share the post “Financial markets point to very data-dependent monetary policy”
