Monetary policy announcements and stock reactions: An international comparison

This article investigates the impact of domestic monetary policy rate announcements on the stock markets of New Zealand, Australia, the United Kingdom and the euro area, using event-study methods to identify stock price reactions to the unanticipated/surprise component of announcements. As Australia and New Zealand did not reach the zero bound we investigate whether there is an impact from the global financial crisis on stock market reactions that can be distinguished from the asymmetric reactions to surprises that characterise the business cycle. We find that the euro area and the UK both show a financial crisis effect but behaviour in New Zealand and Australia does not change. We conduct robustness checks and explore confounding factors, especially the impact of ‘guidance’ from central banks that prepares markets for policy rate changes.

► Reactions to monetary policy surprises are asymmetric varying with the phase of the economic cycle.
► Stock prices react in the opposite direction to the surprise and vary across countries.
► In the GFC only countries later reaching the zero bound showed marked changes in responses.
► Announcing a contingent path for interest rates has an effect on stock prices.
► Stock prices respond differently according to the sign of the surprise.