The committee has begun to plan the process of selling UK government bonds, currently held in the Asset Purchase Facility, later this year. 

Global inflationary pressures have intensified due to the Russian invasion of Ukraine, with energy price increases at the core. Pressure on supply chains is also being felt due to the war, as Ukraine and Russia are both producers of key imports such as metals and fertilisers. Supply chain pressures are also being felt due the Covid-19 resurgence in China, with their Covid Zero policy meaning many cities have been in lockdown since the end of March. 

Inflation continues to rise, reaching 6.1 per cent in February and increasing to seven per cent in March, higher than expected in the February report. Inflation is now expected to reach over nine per cent in Q2, and to average just over 10 per cent at its expected peak in Q4 of this year. This is largely due to the Ofgem utility price cap increase in April, with a further increase of up to 30 per cent expected in the October review. 

Looking further ahead, inflation is expected to decrease materially once energy prices stop rising, however the inflation target of two per cent is not expected to be met for over two years. 

UK GDP growth has slowed and was 0.1 per cent in February with consumer confidence falling due to the squeeze on household disposable incomes. 

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The latest Office for National Statistics (ONS) figures continue to show unemployment decreasing, down to 3.8 per cent in the three months to February, however the number of job vacancies in January to March 2022 reached a record high of 1.288 million.

Although we continue to see unemployment decreasing in the near term, it is expected to rise to 5.5 per cent in three years’ time with slower economic growth. Regular pay (not including bonuses) increased by four per cent from December to February, however once adjusted for inflation sat at -1 per cent on the year, showing inflation is causing an overall reduction in regular pay on households.

 

	Forecast in rates
Effective Rate	One month’s time	Three month’s time	Six month’s time	12 month’s time	Two year’s time	Three year’s time
Bank of England Base Rate*	1.195	1.642	2.177	2.658	2.241	1.991
Two-year fixed rate**	2.339	2.418	2.473	2.441	2.116	1.934
Three-year fixed rate**	2.299	2.339	2.354	2.292	2.036	1.878
Five-year fixed rate**	2.149	2.166	2.164	2.104	1.916	1.810
10-year fixed rate**	1.946	1.954	1.952	1.920	1.827	1.768

* Using OIS Curve [rounded to two decimal points] 

**Based on the swap curve 

 

Due to the continued rise in inflation, markets are expecting further steep increases in the Bank of England base rate with large increases throughout the rest of this year, exceeding two per cent within six months. Markets also expect that the bank rate will increase to over 2.5 per cent within the next 12 months.  

Market participants also expect the two-year swap rate to increase further over the next three months and to then flatten out, with the three-year swap rate following the same path.  

The five and 10-year swap rates have slowly been increasing, but are expected to remain relatively flat over the next 12 months, then to drop slightly in the next two to three years. 

 

UK securitisation market 

Issuances returned into the primary market this month, after an eight-week break due to the geopolitical climate, with four transactions pricings; one from a prime lender and the other three from non-conforming and buy-to-let shelves. 

Currently, in 2022, circa £14bn of UK residential mortgage-backed securities (RMBS) paper have been placed into the market compared to circa £7.6bn this time last year, and around £6.3bn in 2020.