You are here: Home - Better Business - Business Skills -

‘BoE will not enter negative territory and instead begin to increase rates in 2022’ – Maddox

by: Alex Maddox, capital markets director at Kensington Mortgages
  • 17/05/2021
  • 0
‘BoE will not enter negative territory and instead begin to increase rates in 2022’ – Maddox
The Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted unanimously (9-0) to retain its policy rate at record lows of 0.1 per cent, as widely expected by the markets.

 

The BoE also held the total volume of quantitative easing (QE) at £895bn. As expected, given the BoE is ahead of target for its asset purchases programme, the MPC decided to slow down the pace of bond purchases.

In a nutshell, the MPC shifted up its economic outlook given higher consumer spending, the continued progression of the vaccine rollout programme, the low numbers of new COVID cases in the UK and the easing of restrictions on economic activity. Markets expect growth to be stronger than previously anticipated, with unemployment lower than initially forecasted and inflation broadly stable. The recent improvement in the economic and coronavirus outlook strongly suggest that the BoE will not enter negative territory and instead begin to increase rates in 2022, subject to the 2 per cent inflation target being met.

UK GDP fell by 1.5 per cent in Q1 2021, which is less than previously anticipated in the February 2021 report, with March’s GDP growth exceeding expectations at 2.1 per cent. GDP is also expected to rise sharply in Q2 2021 due to the rebound of the economy. However, activity in the quarter is still approximately five per cent below its levels in Q4 2019. The MPC expects 2021 GDP to expand by 7.25 per cent this year – the highest rate in more than 70 years – from February’s estimate at five per cent. This would bring GDP back to its pre-virus levels a quarter earlier than expected. In 2022, the MPC lowers its projection for growth to 5.75 per cent, from its earlier prediction of 7.25 per cent.

 

Jobless numbers

The latest ONS unemployment figures indicate that unemployment has stabilised in recent months and stood at 4.9 per cent in the three months to February 2021. The two key schemes to support the UK workforce, the Coronavirus Job Retention Scheme (CJRS) and the Self-Employed Income Support Scheme (SEISS), have had further extensions until 30 September 2021, which is likely helping to flatten the curve. The MPC now projects unemployment to peak under 5.5 per cent from February’s estimate of 7.75 per cent. Beyond 2021, the MPC expects the unemployment rate to track below five per cent, landing closer to 4.25 per cent in Q4 2023.

 

The rates outlook

Forecasts suggest that the two-year and three-year fixed rates will remain flat over the next six months before beginning to rise towards the end of this year. With the two-year fixed rate set to increase from 25 bps to 50 bps in twelve months and 75bps in two years, the three-year fixed rate will increase to 75bps in twelve months and one per cent in three years. Regarding five-year rates, markets expect the long-term rate will increase to one per cent in two years.

 

UK securitisation market

Primary markets have been very quiet since Easter, with only one deal from Fleet Mortgages. We expect primary volumes to pick up in the next couple of weeks. Due to the lack of paper in the primary market, the secondary market spreads have been tightening week-on-week over the past month.

There are 0 Comment(s)

You may also be interested in