Financial conditions indices can be used to summarise moves in financial variables that affect the economy. The Bank of England has developed a new daily index, the Monetary and Financial Conditions Index (MFCI), to analyse what variables drive changes in UK financial conditions.
The MFCI is a summary index that captures relationships between asset prices, credit variables and the real economy. It is tailored to the UK economy, and incorporates the key variables that influence the Monetary Policy Committee’s central UK GDP forecast, such as sterling.
The index is weighted based on the marginal impact on UK GDP of each variable. The GDP impacts used are broadly similar to those used in the MPC forecast, but the MPC forecast relies on extra inputs and can include the use of judgement, so the two will not always match up exactly. The index can be easily decomposed (Chart A), making it easier to understand the key drivers of changes in UK financial conditions.