Reactions of Energy Futures Market to Monetary Policies in UK

Abstract

One of the principal factors influencing the direction of energy futures prices is frequently thought to be a nation’s monetary policy. Between January 1993 and December 2023, this article intends to empirically examine the energy futures market’s affiliation with monetary policy in the UK and the extent to which monetary policy shocks affected specific energy futures. As a start, monthly data on relevant macroeconomic indicators such as interest rates and the global energy price index are gathered to create a basic VAR model for identifying monetary policy shocks. Single energy futures prices are separately and independently added to the model as the last variable, and the influence of monetary policy on the energy futures market is subsequently inspected sequentially and independently. The influence of monetary policy shocks on energy futures prices is investigated using impulse response and variance decomposition analytic methods. Ultimately, the findings suggest that the prices of energy futures and monetary policy are positive correlated. Price fluctuations in energy futures are significantly and persistently influenced by monetary policy disruptions. However, it makes a minor contribution to the explanation of changes in the price of energy futures. The results offer empirical evidence that could be utilized to investigate energy futures markets through the lens of monetary policy.