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Improved economic outlook could see base rate rise to 0.25 in a year – Maddox

  • 06/08/2021
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Improved economic outlook could see base rate rise to 0.25 in a year – Maddox
The Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted unanimously (9 to 0) to retain its policy rate at record lows of 0.1 per cent, which has been in place since the start of the pandemic in March 2020.


The committee also voted unanimously for the BoE to maintain the stock of sterling non-financial investment-grade corporate bond purchases at £20bn and held the total volume of quantitative easing (QE) at £895bn overall.  

Global GDP rose sharply in Q2 2021 due to successful vaccination programmes and further easing of restrictions. UK GDP is expected to have risen by five per cent in upcoming results for Q2 2021, four per cent below its pre-pandemic level.  

However, this is stronger than previously estimated. It’s anticipated that UK GDP growth will be slower in Q3 2021 at around two per cent, due to the recent increase in coronavirus cases, but is expected to recover by the end of the year. 

Following a large increase in April and May, once restrictions started to ease, household spending remained broadly flat in June and July – close to pre-pandemic levels. As expected, there was a surge in property transactions in June due to the rush to meet the first phase of the stamp duty holiday deadline on 30 June 2021.  

Inflation rose to 2.5 per cent in June year-on-year, above the MPC’s two per cent sustainable target, higher than expected in May’s report and markets predict it will rise to four per cent in Q4 2021, before falling back closer to the two per cent target.  

The latest Office for National Statistics (ONS) unemployment figures indicate that unemployment has remained relatively stable in recent months and stood at 4.8 per cent in the three months to May 2021. It remains to be seen whether this stability continues with the end of the government Coronavirus Job Retention Scheme (CJRS), at the end of September.   

Latest figures for the CJRS show that there were still 1.9 million employees on furlough, a decrease of around 590,000 from the end of May. 


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

*Using OIS Curve 

**Based on the swap curve 


With the BoE base bate remaining at its record low of 10 basis points (bps), the markets have suggested that the borrowing rate will remain flat over the next six months.  

Still, due to an improved recovery projection of the economy, it’s predicted there will be a rate increase to 25 bps earlier than expected, within the next 12 months.  

The forecast for the base rate in two and three years’ time has also moved, with an expectation that once the rate increases to 25 bps, it will remain flat at this level for the next 24 months. 

In line with a slower than expected increase in the base rate, the two-year swap rate is not likely to rise for up to two years and will then increase to 75 bps.  

The three-year swap rate is expected to remain flat over the next two years and then increase to 75 bps in year three. For five and 10-year swap rates, the long-term rate will likely increase to 75 bps in the short-term, and then remain flat over the next three years. 


UK securitisation market 

The UK RMBS primary markets have slowed down for the summer break, with the last transactions seen in the market towards the end of July. Over the last year, more than £10.7bn of UK RMBS paper has been placed into the market. 


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