RESPONSE OF FINANCIAL MARKETS TO ADJUSTMENTS IN THE BANK OF ENGLAND'S TARGET INTEREST RATE

Our general objective is to measure the responsiveness of financial market participants to the Bank of England's target interest rate adjustments. Using official Bank of England interest rate data from 1975 to 1996, we find that British money market interest rate movements are positively and significantly related to the Bank of England's target interest rate adjustments. Furthermore, the degree of response is conditional on whether its meeting dates were known in advance. We also find that British money market interest rates move in tandem with the Bank of England's target interest rate adjustment prior to the adjustment., Furthermore, the Bank of England's adjustments are inversely and significantly related to British equity returns, although the degree of sensitivity of equity returns is conditioned on the direction of the adjustment in target interest rates.