together can measure interest rate risk for large interest rate changes. Typically, in an ALM strategy it is required that the convexity of assets be larger than the convexity of liabilities. If this is the case, when interest rates increase, the value of assets decreases by less than the value of liabilities while when interest rates decrease, the value of assets increases by more than the value of liabilities.
54. A second metric commonly used to address the first limitation mentioned above are keyrate or partial duration. Hardly does the yield curve shifts in
International Monetary Fund. External Relations Dept.
“close to but below 2 percent” has understandably prompted the central bank to raise official interest rates after keeping them on hold for two and a half years. The ECB’s keyrate now stands at 3 percent, with markets expecting another 50 basis points of increases before year’s end. Headline inflation is projected to remain above target, so some further tightening will likely be necessary if the expansion proceeds as expected. But caution is needed, given the risks to growth and given that underlying inflationary pressures are still well contained.