In this article we examine the potential application of the Global Monetary Policy Rate Indexes (GMPRI) in forecasting and understanding financial market trends. We look at the developed and emerging rate indexes and key stock indexes; the S&P 500, the Hang Seng, and the U.S. 10 Year government bond yield, and a commodities index. We find some link in movements between the indexes, with a few notable conclusions.

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The first chart shows the path of the annual change in the developed markets rate index in relation to the S&P 500. The analysis focus on the change, rather than the level. As can be seen in the chart there is a loose link between the two series, as the stock market both predicts and reacts to monetary policy settings. However there is little predictive power, aside from significant drops in the policy rate index occasionally coinciding with

Adding to the stable of the Global Monetary Policy Rate Index, we introduce the Emerging Markets sub-index; a GDP weighted composite interest rate indicator for 21 emerging markets. The Index has been built out to January 2000. In addition to the Emerging Markets sub-index, we will also look at the Emerging Markets [EM] + Developed Markets [DM] composite index; providing a virtually global indicator of monetary policy rates. The use of DM and EM indexes are also of interest in terms of spreads and relative movements, as will be explained.

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First of all, as noted the emerging markets index (which contains the same countries as the MSCI Emerging Markets Index; however is constructed using annual IMF GDP weights; phased monthly using a 5-year moving average) has been extended back to January 2000. A quick look at the index shows the battle that many emerging markets

Following on from the initial launch of the GMPRI [Global Monetary Policy Index] this research note focuses on the Developed Markets sub-index. The first point to note is that we have developed history for the index back to January 1999 (data file is available at the bottom of this article). While the method of GDP weighting is also discussed, we have overlain a couple of key data series with the index to demonstrate the value of the index in strategy and forecasting, for improving investment decisions.

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The first chart shows the index history back to January 1999, unsurprisingly the index drops during recessions due to the generally pro-cyclical nature of monetary policy (rates rise during boom times, and drop during recessions). It is also worth noting that we modeled four alternative GDP weighting methods (static weight from 2010, a static long-term average, monthly phasing

We have developed a set of interest rate indexes to track broad trends in monetary policy across the globe. The index is essentially a GDP weighted average interest rate, thus the index can also be used to estimate the cost of capital, assessing monetary policy tightness/looseness, and other macro economic and financial market analysis for the broad groups. There are four indexes: All, Developed, Emerging, and Lesser Developed & Frontier markets. The full methodology and components are detailed below.

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Commentary:

As can be seen in the initial print of the chart, emerging markets and LDF markets were generally tightening rates during 2011, but have begun to reverse course given the the uncertain environment and deterioration in global economic conditions. As at January the indexes stood as follows: All 2.77% (2.58% in 2011), Developed 0.68% (0.70% in 2011), Emerging 6.52% (6.05% in 2011), and Lesser Developed &

This article reviews the monetary policy interest rate activity of the world's central banks during 2011. The major theme of the year was monetary policy tightening, but the second half of the year featured many banks opting to reverse course or switch to outright net loosening. Indeed of the 87 central banks that Central Bank News monitors, 34 made net increases to their interest rates, while 32 held their rates net unchanged, and 21 made net reductions to their policy interest rates, many of these in the second half of the year (see: Global Interest Rate Movements: Half-Year Review).

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Of the central banks that net increased their interest rates, the average increase was 281 basis points (skewed up by Belarus; the average would be 185 excluding Belarus). There were 18 central banks tightening by 100 or more basis points. The outliers were Belarus 3450bps, Kenya