The Russian invasion of Ukraine and its effect on the global economy, and in particular on inflation, was discussed at length by the committee members.
Inflation continues to rise, increasing from 5.4 per cent in December to 5.5 per cent in January. The February report expected inflation to peak this April at around 7.25 per cent and then start to reduce, however the invasion of Ukraine has led to further large increases in energy prices and other commodities such as food prices. This in turn means that inflation is now expected to reach eight per cent in Q2 2022 and potentially climb even higher towards the end of this year when Ofgem’s utility price caps could again be increased.
Looking further ahead, inflation is expected to decrease materially once energy prices stop rising, however the inflation target of two per cent not expected to be met for over two years.
While UK GDP in January was stronger than expected, consumer confidence has fallen due to the squeeze on household disposable incomes.
The latest ONS figures continue to show unemployment decreasing, with figures down to 3.9 per cent in the three months to January. However, the squeeze on incomes and cost of living is anticipated to drive up unemployment in the coming years.
| Forecast in rates | ||||||
| Effective Rate | One months’ time | Three months’ time | Six months’ time | 12 months’ time | Two years’ time | Three years’ time |
| Bank of England Base Rate* | 0.821 | 1.221 | 1.659 | 2.071 | 1.833 | 1.602 |
| Two-year fixed rate** | 1.832 | 1.907 | 1.963 | 1.963 | 1.717 | 1.546 |
| Three-year fixed rate** | 1.825 | 1.862 | 1.881 | 1.842 | 1.641 | 1.486 |
| Five-year fixed rate** | 1.710 | 1.724 | 1.723 | 1.677 | 1.519 | 1.413 |
| 10-year fixed rate** | 1.532 | 1.540 | 1.541 | 1.522 | 1.457 | 1.412 |
* Using OIS Curve [rounded to 2dp]
**Based on the swap curve
Due to rising inflation, markets are expecting a much steeper incline in the Bank of England base rate with large increases throughout 2022, exceeding the one per cent mark within three months, sooner that initially thought. Markets also expect that the bank rate will increase to two per cent within the next 12 months.
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, the two and three-year swaps are anticipated to drop back down in two and three- years’ time. The five and 10-year swap rates have slowly been increasing, although they are seen to be relatively flat over the next six months, however markets see these rates dropping slightly in the next one to two years.
UK securitisation market
Due to the recent geopolitical tensions between Ukraine and Russia, there has been a high degree of volatility in the markets over the last few weeks. Issuances into the primary market have been very low, with issuers monitoring the situation and waiting to bring transactions as soon as a viable window opens.
So far in 2022, just over £13.3bn of UK residential mortgage backed securitisation (RMBS) paper has been placed into the market compared to £6.8bn at this time last year and £4.6bn this time in 2020.
