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Macroeconomic surprises and financial market reactions: insights into euro-area interest rates

Author

Listed:
  • Riccardo Poli

    (Bank of Italy)

  • Giulio Carlo Venturi

    (Bank of Italy)

Abstract

This paper examines how euro-area (EA) interest rates react to EA and US macroeconomic surprises. We find that the sensitivity of interest rates to surprises varies across tenors and over time. Short-term OIS rates are significantly less sensitive to macroeconomic surprises than longer-term rates. During the forward guidance period (2013-22), interest rate reactivity was rather muted, especially at the short end of the yield curve. Term premia accounted almost entirely for the sensitivity observed at the long end of the curve. Since the ECB’s adoption of a data-dependent and meeting-by-meeting approach, interest rate sensitivity has forcefully surged back to the levels observed during the Great Financial Crisis. In particular, EA OIS rates have become highly sensitive to US surprises, thus pointing to significant spillovers from US economic developments to EA financial conditions. Monetary policy uncertainty amplifies the sensitivity of interest rates to surprises, especially to those related to US economic developments and for the expected short term rate component.

Suggested Citation

  • Riccardo Poli & Giulio Carlo Venturi, 2025. "Macroeconomic surprises and financial market reactions: insights into euro-area interest rates," Questioni di Economia e Finanza (Occasional Papers) 959, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_959_25
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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