The Effects of Monetary Policy in the United Kingdom: New Evidence From SONIA Market Responses
Year: 2026
Type: article
Abstract: ABSTRACT This paper constructs a new measure of the UK monetary policy instrument (MPI) using daily changes in the sterling overnight index average (SONIA) around Bank of England policy events from June 1997 to August 2025. The instrument explicitly accounts for pre‐event information and unconventional monetary policy (UMP) using lagged macro‐financial factors and a shadow rate‐based measure of unconventional policy. We use the instrument in a monthly structural vector autoregression (VAR) to estimate the effects of UK monetary policy shocks. Following a contractionary shock normalised to a 100‐basis‐point increase in the Bank Rate, real GDP growth falls by about 0.4 percentage points, unemployment rises by around 0.2 percentage points, and consumer price inflation declines by about 0.2 percentage points. Equity prices fall sharply, with a peak response of about 2% after 1 year. Sterling initially appreciates but subsequently depreciates, while private credit and house prices decline with a delay. The estimated responses are qualitatively similar across the full and pre‐pandemic samples, alternative policy‐event sets, alternative treatments of potential confounders, and local‐projection estimates. They also broadly accord with responses obtained using established high‐frequency measures of UK monetary policy surprises.
DOI: 10.1002/ijfe.70306
Authors: Ayobami E. Ilori, Lucia M. Murgia
Institutions: The Open University, University College London
Language: English
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,400
OpenAlex ID: W7213753423