The last time the MPC raised interest rates was in August 2018, when it reached 0.75 per cent. The committee voted unanimously to maintain the BoE Quantitative Easing (QE) programme of asset purchases, which will result in buying £875bn government bonds, along with £20bn of corporate bonds.
UK GDP increased in Q3 2021, although slower than predicted due to supply chain disruption. However, it’s on track to return to pre-Covid levels in Q1 2022.
The BoE revised down its expectations for UK GDP for Q4 2021 by around 0.5 per cent since the November report, leaving the economy around 1.5 per cent off its pre-Covid level.
Inflation rose to 5.1 per cent last month, hitting a decade high.
Bank of England governor Andrew Bailey commented that rising gas prices, driven by tensions between Russia and Ukraine, will push UK inflation to six per cent in the next few months – the highest level in 30 years.
The latest Office for National Statistics (ONS) unemployment figures continue to see a stable outlook with another slight decrease down to 4.2 per cent in the three months to October. However, we remain to see whether this continues now that the government’s Coronavirus Job Retention Scheme has ended.
The BoE said it now expected Britain’s unemployment rate to fall to around four per cent before the end of this year, much lower than the November report projection of 4.5 per cent. UK employers have suffered staff shortages this year as Brexit compounds the loss of migrant workers caused by the pandemic last year.
| Forecast in rates | ||||||
| Effective rate | One month time | Three months’ time | Six months’ time | 12 months’ time | Two years’ time | Three years’ time |
| Bank of England base rate* | 0.250 | 0.395 | 0.699 | 1.044 | 0.990 | 0.829 |
| Two-year fixed rate** | 0.609 | 0.623 | 0.917 | 1.145 | 1.120 | 0.953 |
| Three-year fixed rate** | 0.979 | 1.059 | 1.121 | 1.151 | 1.035 | 0.894 |
| Five-year fixed rate** | 1.020 | 1.064 | 1.092 | 1.085 | 0.968 | 0.854 |
| 10-year fixed rate** | 0.966 | 0.987 | 0.995 | 0.973 | 0.884 | 0.804 |
* Using OIS Curve [rounded to five basis points (bps)]
**Based on the swap curve
Markets expect the BoE base rate to increase to around 40bps in early 2022 and then increase over the next year in line with the implied path.
Market participants also expect two and three-year swap rates to increase steadily over the next year. Rates are anticipated to drop back down slightly in two and three years’ time.
While the five and ten-year swap rates have been slowly increasing, rates are set to remain quite flat over the next three years.
UK securitisation market
While the primary market remains quiet as we enter the holiday season, in 2021, just under £13.5bn of UK residential mortgage backed securities (RMBS) paper has been placed into the market compared to £13bn last year – and £20.7bn in 2019.
Levels remain lower than pre-Covid due to the continued low amount of prime issuance into the market.
