Investigating the Impact of Monetary Policy on Stock Market Performance in the United Kingdom: Evidence from 2000 to 2023

Abstract

The findings of this research are significant to three groups: policymakers, financial market actors, and researchers. To policymakers, particularly those in the BoE and His Majesty’s Treasury, the findings will help them understand how the combination or lack of it of conventional (bank rate) and nonconventional (QE) policies affects the performance of stock markets in the UK over time. This is significant as the study will have captured relative periods of stability in the financial markets and periods of volatility such as the financial crisis, the Eurozone crisis, the Brexit uncertainty, the COVID-19 crisis, and the recovery period after the pandemic in and how the monetary policy regime implemented during these periods did affect the stock returns in the UK’s largest companies. For financial market actors such as asset managers, investors, and financial analysts, they will be better able to inform their risk management and investment strategies, informed by the findings on the effects of the monetary policy regime on stock market performance. These actors will better position themselves to benefit from periods of expansionary and contractionary monetary policy as they will better allocate assets as well as diversify their portfolio with the knowledge of how markets respond to all information available, including the monetary policy information. Lastly, this study will contribute to academics and research by contributing to the theory through the empirical findings. Besides contributing to building a consensus on the effect of monetary policy instrument adopted by the BoE and other central banks on the stock market performance as measured by returns, the study will act as a foundation for future discourse on how monetary authorities can use both interest rates and open market operations such as QE to improve the economic performance of the UK through enhanced stock market performance. In addition to addressing the conceptual, contextual, and methodological gaps identified, the findings will offer a model for future investigations to explore regime-based policy effects.