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BoE policy tightening could be next move to meet inflation target – Maddox

by: Alex Maddox, capital markets director at Kensington Mortgages
  • 27/09/2021
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BoE policy tightening could be next move to meet inflation target – Maddox
The Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted unanimously to retain its borrowing rate at 0.1 per cent this month.


However, the committee was split 7-2 on whether to end the quantitative easing (QE) programme of asset purchases immediately. The majority of members voted in favour of maintaining QE which will result in £895bn of assets bought by the end of the year.  

At the last meeting, it was forecast that UK GDP would have risen by 2.9 per cent in Q3 2021. Yet growth, both in the UK and globally, has slowed down sooner than anticipated and the outlook for UK GDP growth in Q3 was revised down to 2.1 per cent. 


Inflation watch 

The MPC’s main concern is rising inflation. It’s likely to remain above the two per cent target rate for most of next year and expected to be above four per cent until Q2 2022. Inflation’s peak is largely due to a rise in energy and goods prices.  

Given inflation will become significantly higher above target, modest policy tightening may be necessary to meet the target rate over the medium term.  

The committee indicated that rate rises were not planned in the short term and that further decisions on interest rates will depend on unemployment levels, with the furlough scheme about to come to an end. The committee stated they will probably wait until February 2022 to start gathering data. 

The latest ONS unemployment figures continue to show a stable outlook in recent months and stood at 4.6 per cent in the three months to July; confirming a downward trend.  

The government Coronavirus Job Retention Scheme is expected to wind down at the end of month, so eyes will be focused on whether the figures remain robust afterwards. While the number of people furloughed has continued to decline, latest figures show that there were still approximately 1.7m employees relying on the scheme. 

   Forecast in rates (changes rounded to nearest 0.25 per cent) 
Effective Rate  One month’s time  Three months’ time  Six months’ time  12 months’ time  Two years’ time  Three years’ time 
Bank of England Base Rate*  0.05   0.05   0.15   0.40   0.50   0.70  
Two-year fixed rate**  0.48   0.53   0.61   0.73   0.84   0.89  
Three-year fixed rate**  0.59   0.63   0.69   0.77   0.87   0.91  
Five-year fixed rate**  0.71   0.74   0.78   0.84   0.90   0.93  
10-year fixed rate**  0.86   0.87   0.90   0.93   0.98   1.00  
* Using OIS Curve [rounded to 5bps] 
**Based on the swap curve 


Markets expect the Bank of England base rate to increase in the second half of 2022 to 40bps and a further increase within two years, rising to 50bps. 

Market participants also expect the two and three-year swap rates to increase steadily over the next three years. The five and ten-year swap rates have been slowly increasing, however the rates are set to remain quite flat in the short term. 


UK securitisation market

The UK residential mortgage backed security (RMBS) primary markets have been very active since the beginning of September, with a flurry of issuances from specialist banks and non-bank lenders. Pricing is, on average, five to 15bps tighter across the curve versus the primary issuances of last July.  

All deals have been healthily oversubscribed with an average of 15 to 20 investors participating in each transaction.  

So far in 2021, more than £12.5bn of UK RMBS paper has been placed into the market compared to £12.7bn last year and £16.3bn in 2019.  

Levels remain lower than pre-Covid due to the low amount of prime issuance into the market, with banks taking advantage of the various government funding schemes launched since the pandemic, and in particular the Term Funding Scheme (TFS). 

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