New Information from Inflation Swaps and Index-Linked Bonds

Abstract

Prices of index-linked financial instruments can be used to obtain market-based measures of inflation expectations and real interest rates. These measures are regularly used by the Bank's Monetary Policy Committee to inform its assessment of economic conditions. In the United Kingdom, the index-linked gilt market is long established and has been used to infer such measures for many years. More recently, international index-linked markets have developed further, with increased issuance of index-linked bonds and greater use of index-linked derivatives. This article outlines how new market data provide useful additional information. We show that inflation swap rates can be used to estimate market expectations of inflation, and how the larger range of information from index-linked markets facilitates analysis of market-based expectations for inflation and real interest rates across countries.