Modelling the Effect of Bank of Russia Key Rate Forecasts on Market Participants’ Expectations

If financial market participants do not react to key rate forecasts, then providing information about future decisions in the form of published quantitative forecasts of the key rate path may turn out to be ineffective. This study evaluates the effects of such forecasts, as well as surprises in key rate decisions, on government bond yield curve over maturities of three months to 15 years. Yield curve acts as the main indicator of financial market participants’ expectations. Using a Bayesian approach to the estimation of a spike-and-slab regression via the Markov Chain Monte Carlo algorithm, I find that key rate forecasts published by the Bank of Russia in its medium-term forecasts based on the results of monetary policy meetings have a more pronounced effect on short- and medium-term bond yields, while bond yields over seven to 15-year maturities are less sensitive. As expected, surprises in key rate decisions affect the entire yield curve. The Bank of Russia’s key rate forecasts publication thus helps form market participants’ expectations.