New estimates of the UK term structure of interest rates

The Bank has recently (November 1999) switched to a new approach for estimating the term structure of interest rates from the prices of gilts. The new method is known as the Variable Roughness Penalty (VRP) model, and replaces the previously used Svensson and ITS (based on Svensson) models. This article briefly describes the new model and outlines the reason for its adoption in preference to the earlier models. More detailed information can be found in “New estimates of the UK real and nominal yield curves”, Bank of England Quarterly Bulletin, November 1999, and also in a forthcoming working paper, entitled “New estimates of the UK real and nominal yield curves” by Nicola Anderson and John Sleath.