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Pessimissm towards UK’s economic outlook to last until year-end – Maddox

by: Alex Maddox, capital markets director at Kensington Mortgages
  • 20/06/2022
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Pessimissm towards UK’s economic outlook to last until year-end – Maddox
The Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted by a majority of 6-3 to increase the borrowing rate by 0.25 per cent to 1.25 per cent as most market participants had expected; those in the minority favoured a larger increase of 0.5 per cent to 1.5 per cent.


Global inflationary pressures have continued, exacerbated by the war in the Ukraine, causing significant rises in the cost of many goods and services particularly certain agricultural commodities and energy.  

UK inflation continues to rise and was at a record high of nine per cent in the 12 months to April; it is expected to sit at nine per cent in the near term and increase further to over 11 per cent in October, when the next Ofgem utility price cap increase is expected and could increase energy prices up to 30 per cent more. 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 in the next two years. 

UK GDP growth was slightly lower than expected, increasing by 0.8 per cent in Q1 2022, however it is expected to fall by 0.3 per cent in Q2 2022. 

The latest Office for National Statistics (ONS) figures show unemployment has stabilised, remaining at 3.8 per cent in the three months to April, and employment grew by 0.5 per cent. 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 due to slower economic growth. Regular pay (not including bonuses) increased by 4.2 per cent from February to April, however on a relative value once adjusted for inflation sat at -2.2 per cent, with rising inflation causing a real impact on households and their cost of living. 

Overall, markets seem pessimistic about the broader macro-outlook in the UK for the remainder of the 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*  1.25 per cent   2.30 per cent  3.00 per cent   3.35 per cent   2.80 per cent   2.60 per cent  
Two-year Fixed Rate**  3.00 per cent   3.10 per cent   3.14 per cent   3.03 per cent   2.70 per cent   2.54 per cent  
Three-year Fixed Rate**  2.93 per cent  2.99 per cent   2.99 per cent   2.89 per cent   2.63 per cent   2.47 per cent 
Five-year Fixed Rate**  2.77 per cent   2.79 per cent   2.79 per cent   2.70 per cent  2.49 per cent   2.38 per cent  
10-year Fixed Rate**  2.54 per cent   2.55 per cent   2.55 per cent   2.50 per cent   2.41 per cent   2.36 per cent 

* 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 three months and hitting three per cent in six months. Markets also expect that the bank rate will increase further to over three per cent within the next 12 months.  

The two-year swap rate has reached its highest level since 2008 at just over three per cent, having not been over 1.5 per cent since 2008. Market participants expect it to sit around three per cent for the next 12 months before starting to decline in two years’ time, with the three-year swap rate following the same path. The five and 10-year swap rates are expected to remain relatively flat over the next 12 months, and then dropping slightly in the next two to three years. 


UK securitisation market

Primary markets have been quiet given the current market conditions, featuring rising interest rates and increased volatility. While we saw three residential mortgage-backed securitisation (RMBS) near-prime transactions accessing the market, they all have been pre-placed to minimise current execution risk. 

Currently in 2022, there has been c. £16bn of UK RMBS paper placed into the market compared to c. £9.7bn at this time last year and £6.3bn in 2020; however, this year only c. £6bn of that is from new originations, the remaining being large refinancing transactions of legacy assets. 

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