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Swap rates and Bank of England waiting for Brexit clarity – Maddox

by: Alex Maddox, capital markets and digital director at The Northview Group
  • 23/11/2018
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Swap rates and Bank of England waiting for Brexit clarity – Maddox
Unsurprisingly, the Bank of England unanimously kept the base rate at 0.75% in November, in line with consensus amid prevailing Brexit uncertainty.

 

At the last Monetary Policy Committee (MPC) meeting, governor Mark Carney reiterated the ‘gradual pace’ and ‘limited extent’ of tightening monetary policy.

However, with Consumer Price Index inflation still wavering above the 2% mark, markets expect rates to increase within the next few years. The exact timing, though, is unclear.

As ever, it’s until there is more certainty around a deal being agreed with the European Union and approve by parliament ahead of Brexit.

 

Brexit, Brexit, Brexit

Should the UK fail to negotiate a smooth transition with the EU, we may expect extraordinary measures from the Bank of England to protect the UK from a negative economic shock.

Again, it remains unclear what exact measures would be introduced, but Carney has emphasised that there is ‘little monetary policy can do’ to offset the impact of a no deal.

If a smooth transition is agreed, the Bank of England will likely tighten monetary policy faster than currently expected.

For now, the MPC has revised its GDP forecasts for the year and next downwards by 0.1% – from 1.4% to 1.3% in 2018 and 1.8% to 1.7% in 2019.

In terms of inflation, the Bank of England lowered its 2019 forecast from 2.2% to 2.1%, but current inflation for 2018 was revised upwards to 2.5%.

Despite record low unemployment at 4% and wage growth rising above 3% in August, markets remain gripped by Brexit.

 

Market expectations

In light of these considerations, the markets forecast the Bank of England base rate to hold at 0.75% for the next 12 months.

They then predict an increase of 0.25% to 1%, remaining there, before rising to 1.25% after three years.

 

 

The three-month London Interbank Offered Rate (LIBOR) is expected to rise sooner than the base rate, moving from 0.75% to 1% in the next month.

In the swap markets, current predictions for two-year rates are that they will stay at 1.25% for the next year, rising to 1.5% around the two-year mark.

Similarly, five-year swap rates will remain at 1.25%, rising to 1.5% in two years.

Lastly, 10-year swap rates are expected to remain at 1.5% for the next two years, before rising to 1.75% in three years’ time.

 

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