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Strong GDP growth indicates slow and steady path for interest rate rises – Maddox

by: Alex Maddox, capital markets director at Kensington Mortgages
  • 09/07/2021
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Strong GDP growth indicates slow and steady path for interest rate rises – Maddox
In June, the Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted unanimously to retain its policy rate at record lows of 0.1 per cent.

 

MPC members all also backed maintaining the stock of sterling non-financial investment grade corporate bond purchases at £20 billion, and held total volume of quantitative easing at £895 billion overall. 

 

Faster-than-expected recovery

Since May’s meeting, growth in gross domestic product (GDP) globally has been stronger than anticipated. The expected level of UK GDP in Q2 2021 is now 1.5 per cent above what was previously predicted.  

June is expected to be about 2.5 per cent below its pre-Covid Q4 2019 level. A faster recovery has been in large part due to consumer-facing services, as restrictions eased from April onwards. 

Twelve-month consumer price index (CPI) inflation rose from 1.5 per cent in April to 2.1 per cent in May, above the MPC’s two per cent target and earlier than predicted. Inflation is expected to rise further and is likely to exceed three per cent for a short period this year, primarily due to developments in energy prices.  

The MPC predicts that there will be a period of strong GDP growth and above-target inflation, after which inflation will fall back in line. 

The latest unemployment figures from the Office for National Statistics indicate that unemployment has dropped slightly in recent months and stood at 4.7 per cent in the three months to April 2021.  

Also, the number of jobs furloughed under the Coronavirus Job Retention Scheme (CJRS) has continued to drop with 3.6 million jobs furloughed in April, dropping to below two million in May and around 50 per cent of those are on a flexible form of furlough. 

 

Rate predictions 

Forecast in rates (changes rounded to nearest 0.25 per cent) 
Effective Rate  1mth time 3mth time 6mth time 12mth time 2yrs time 3yrs time
Bank of England Base Rate*       

0.250 

 

0.500
2yr Fixed Rate**        0.250  0.500  0.750 
3yr Fixed Rate**  0.500  0.500  0.500  0.750  0.750  1.000 
5yr Fixed Rate**  0.500  0.500  0.500  0.500  0.750  0.750 
10yr Fixed Rate** 0.500 0.750 0.750 0.750 1.000 1.000

* Using OIS Curve 

**Based on the swap curve 

 

With the Bank of England Base Rate currently held at its very low, 10 bps level, the markets have suggested that the rate will remain flat over the next year whilst the economy continues to recover and will then start to rise in two years.  

However, this rise is predicted to be slower than previously expected, with the base rate rising to 25 bps then 50 bps in two and three years respectively. 

Forecasts remain wholly unchanged for the two-year and three-year fixed rates staying flat over the next six months before beginning to rise towards the end of this year.  

The two-year fixed rate is set to increase from 25 bps to 50 bps in twelve months and to 75 bps in two years, and the three-year fixed rate to increase to 75 bps in 12 months’ time and then to one per cent in three years. In respect of the five-year rates, it’s expected that the long-term rate will increase to one per cent in two years. 

 

UK securitisation market 

The UK residential mortgage backed securities (RMBS) primary markets have been a lot more active over the last few weeks with six issuances into the market since mid-May, one from a prime lender and the remainder from the specialist market, including Kensington’s own inaugural green bond, the first Green UK RMBS issuance. 

Year-to-date there have been over £9.7 billion of UK RMBS paper placed into the market. 

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