The Committee voted unanimously to start reducing the BoE Quantitative Easing (QE) programme of asset purchases by ceasing reinvestment in maturing assets, and initiating the sale of corporate bonds once the bank rate has risen to at least one per cent. The stock of bonds will be fully diminished by the end of 2023.
UK GDP returned to its pre-Covid level towards the end of last year, and although the emergence of Omicron dampened it, it’s expected to recover fully this quarter.
Looking ahead, growth is expected to slow down due to higher energy prices, coupled with an increase in goods trade prices. Goods trade prices, both in the UK and globally, have risen at their fastest pace in more than nine years due to rising commodity prices, transportation costs and energy prices. Ofgem also recently announced a higher-than-expected energy price cap rise of 54 per cent versus the 40-50 per cent market expectation.
Inflation continues to rise with levels moving from 5.1 per cent in November to 5.4 per cent in December, the highest level since 1982. It’s expected to peak in April at a staggering 7.25 per cent. The inflation target of two per cent is not expected to be met for over two years, with the rise in energy and good prices being key influencers.
The latest ONS figures continue to show unemployment decreasing. With figures down to 4.1 per cent in the three months to November and expected to fall further still in 2022, the squeeze on incomes and cost of living is anticipated to drive up unemployment in the coming years.
| 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* | 0.54 | 0.83 | 1.17 | 1.55 | 1.47 | 1.27 |
| Two-year fixed rate** | 1.33 | 1.41 | 1.48 | 1.52 | 1.37 | 1.22 |
| Three-year fixed rate** | 1.37 | 1.41 | 1.44 | 1.44 | 1.30 | 1.18 |
| Five-year fixed rate** | 1.31 | 1.33 | 1.34 | 1.32 | 1.21 | 1.13 |
| 10-year fixed rate** | 1.19 | 1.20 | 1.20 | 1.19 | 1.14 | 1.09 |
* Using OIS Curve [rounded to 2dp]
**Based on the swap curve
Markets expect the Bank of England base rate to increase throughout 2022 and hit the one per cent mark in six months, which is sooner that initially thought. Markets also expect that the bank rate will increase to 1.5 per cent within the next 12 months. This is ahead of the BoE’s implied path which sees the bank rate hitting 1.5 per cent in 18 months’ time.
Market participants also expect the two-year swap rate to increase steadily over the next year with the three-year swap rate flattening in the near-term. However, it’s anticipated that it will drop back down slightly in two and three years’ time.
The five and ten-year swap rates have also slowly been increasing, however markets see these rates dropping in the next one to two years.
UK securitisation market
The primary market has had an exceptionally busy start to the year with UK residential mortgage-backed securities (RMBS) leading the asset classes. Seven transactions have been placed into the market consisting of one prime transaction from Nationwide (their first time in the market in two years), three BTL transactions and three non-conforming transactions.
So far in 2022, just over £5bn of UK RMBS paper has been placed into the market compared to £1.5bn at this time last year and £2.4bn this time in 2020.
