The Bank of England released Staff Working Paper No. 1,114 examining a directional liquidity-based transmission channel that helps explain why commodity futures react differently to monetary policy. Using high-frequency identification around Federal Open Market Committee (FOMC) announcements, the authors find that trading volume in commodity futures typically declines after monetary policy surprises, that more actively traded commodities are more exposed to those surprises, and that the direction of the target rate change affects the strength of the transmission. The analysis covers 19 commodity futures in the S&P Goldman Sachs Commodity Index (S&P GSCI) over November 2000 to December 2008. Event-study estimates suggest a 100 basis point surprise increase in the policy rate reduces daily trading volume by around USD 0.37bn to USD 0.81bn, and cross-sectional panel results indicate that contractionary surprises have larger negative effects on returns for higher-volume contracts, while expansionary actions show limited evidence of liquidity-based price transmission; robustness checks include alternative return windows, a 3-month Eurodollar futures proxy for the policy rate, and a one-week trading-volume measure. The paper is published to elicit comment and debate and does not represent Bank of England policy.
Bank of England 2025-01-24
Bank of England publishes staff working paper on liquidity-based monetary policy transmission to commodity futures
The Bank of England's Staff Working Paper No. 1,114 examines a liquidity-based transmission channel affecting commodity futures' reactions to monetary policy. It finds trading volumes typically decline after monetary policy surprises, with more actively traded commodities more affected. Covering data from 2000 to 2008, the paper suggests contractionary surprises have a larger negative impact on high-volume contracts, while expansionary actions show limited liquidity-based price transmission.