The Predictability of Global Monetary Policy Surprises 
Surprise changes to short-term interest rates around central bank announcements—commonly termed “monetary policy surprises”—have been shown to be predictable using information available before the announcements. This is notable given the profit opportunity this predictability presents in such an important market. This paper investigates the predictability of monetary policy surprises in an international context. The author constructs a data set with monetary policy surprises across nine central banks—covering Australia, Canada, the euro zone, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States—and around 2,000 announcements.
Key Findings
- Monetary policy surprises across nine countries/zones co-move together and with the global interest rate cycle. When global central banks are tightening (easing) policy, monetary policy surprises are positive (negative). These changes are sizable and have often been equivalent to a quarter-point cut (increase) across an easing (tightening) cycle.
- Recent change in global interest rates more strongly predicts monetary policy surprises than other proposed predictors, including recent asset price changes and economic news. This result holds for a range of different interest rate measures, for different windows of the monetary policy surprises, and across individual countries/zones.
- Recent change in global interest rates predicts monetary policy surprises because markets underreact to the signals from global rates.
Implications
It appears that markets underreact to the signals from global interest rates because those rates are difficult to parse, which stands to reason given that economists have only recently begun to understand global cycles in financial assets. This inability of markets to read the signals from interest rate changes may also explain why they have persistently missed opportunities to profit from predictable interest rate movements around central bank announcements.
Abstract
Markets systematically misprice interest rate changes around central bank announcements. I show that the strongest predictor of this mispricing is recent change in global interest rates. More specifically, a 1 percentage point increase in global short-term interest rates in the 15 days before a central bank meeting is associated with a 12 basis point surprise increase in short-term rates at that meeting. I demonstrate that this is the result of markets underreacting to signals coming from the global interest rate cycle.