Financial Market Reaction to Government and Central Bank Announcements: the Evidence from Bank of England

This paper analyses the effects of announcements made by the Bank of England officials and the UK Government authorities on the FTSE100 index and GBP/USD exchange rate. We focus on the United Kingdom as communication of policy-makers in this country has several peculiar properties. First, there is a strict communication guidance for FPC and MPC. Second, there is a clear division of responsibilities between departments. Finally, MPC includes a non-voting member from HM Treasury, who helps central bank officials to be fully informed about fiscal policy developments, while the government authorities are kept informed about monetary policy. Using daily data from July 2014 until February 2016, we estimate ARMA-EGARCH models which allow to evaluate the impact of the announcements not only on the average values of returns, but also on their volatility. Our findings suggest that statements of both fiscal and monetary policy authorities have significant impact on the exchange rates and stock exchange indexes. Moreover, we show that similar statements of the Bank of England officials and the UK Government authorities have opposite effects on the financial market. We suggest these results can be explained by mistakes in expectations of the market agents or by low frequency of the Government forecasts.