Better Business
BoE raises rates again following market turbulence – Maddox
Guest Author:
Alex Maddox, capital markets director at Kensington MortgagesThe Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted by a majority of seven to two to increase the borrowing rate by 75 basis points (bps) to three per cent.
One member favoured a 50bps increase while another preferred a smaller increase of 25bps. The 75bps hike was broadly in line with market expectations although the communication around forward guidance was more dovish than expected. While the BoE confirmed that more tightening is to be expected in the short term, the terminal rate next year should be nearer to four per cent rather than the five per cent anticipated by the markets.
This was the eighth consecutive rise to the base rate, the largest increase in 33 years and the highest rate in 14 years.
Economic instability
Since the September meeting, markets have experienced a period of exceptional volatility with significant fluctuations in UK asset prices, particularly long-dated gilts, and sharp increases in market interest rates. The higher market yield curve has pushed new mortgage rates to levels not seen since the 2008 financial crisis.
The average rate on a 75 per cent loan to value (LTV) mortgage increased from 3.6 per cent in August to 4.2 per cent in September and six per cent in October. Market conditions stabilised on the back of the BoE’s decision to delay quantitative tightening and buy long-dated UK government bonds for a set period, which restored some financial stability.
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UK inflation saw a slight increase to 10.1 per cent in September, up from 9.9 per cent in August and is projected to rise to around 11 per cent in Q4. This is lower than previous predictions, reflecting the impact of the government’s Energy Price Guarantee. The length of support provided by the scheme, however, has been curtailed at six months, instead of two years, and thereafter will be targeted at specific demographics i.e., through means testing.
UK GDP is estimated to have fallen by 30bps in August, following a 10bps increase in July. Overall, GDP is predicted to have contracted by 50bps in Q3 of 2022 and to have declined by 75bps in the second half of 2022. The BoE believes that the UK is on course to be in recession throughout 2023 and into the first half of 2024 before any recovery begins.
While the UK is believed to have already entered recession, the labour force continues to expand with the latest Office for National Statistics figures showing that unemployment has decreased again, dropping to 3.5 per cent in the three months to August, the lowest rate since 1974.
Regular pay (not including bonuses) continues to increase and was up 5.4 per cent from June to August. Once adjusted for inflation, however, regular pay was shown to have declined by 2.9 per cent, in one of the largest falls since comparable records began in 2001.
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* | 3.27 per cent | 4.03 per cent | 4.53 per cent | 4.58 per cent | 4.05 per cent | 3.77 per cent |
Two-year fixed rate** | 4.34 per cent | 4.40 per cent | 4.38 per cent | 4.25 per cent | 3.91 per cent | 3.66 per cent |
Three-year fixed rate** | 4.24 per cent | 4.26 per cent | 4.22 per cent | 4.09 per cent | 3.79 per cent | 3.53 per cent |
Five-year fixed rate** | 4.00 per cent | 3.99 per cent | 3.95 per cent | 3.82 per cent | 3.55 per cent | 3.35 per cent |
10-year fixed rate** | 3.56 per cent | 3.56 per cent | 3.53 per cent | 3.46 per cent | 3.34 per cent | 3.24 per cent |
* Using OIS Curve
**Based on the swap curve
Although a more dovish outlook is expected for future base rate rises, markets are still pricing increases of up to 150bps throughout December and into the first half of next year.
Markets have stabilised following the market turmoil brought on by the mini Budget announcement with the two-year swap rate currently sitting at 4.4 per cent after reaching almost six per cent at the end of September. Markets expect it to remain around this level for the next six months before falling in Q4 of next year, with the three-year swap rate predicted to follow the same pattern. The five and 10-year swap rates are expected to remain relatively flat over the next six months, before slowly beginning to decline.
UK securitisation market
The asset-backed security (ABS) market started to settle towards the end of October, after the heavy secondary market selling took place, brought on by market instability and volatility in gilt prices after the mini Budget. Primary activity picked up slightly, with two UK residential mortgage-backed securitisation (RMBS) transactions pricing in the last week of October.
The first being a prime UK RMBS STS owner-occupied transaction from Clydesdale Bank and the second transaction from the Twin Bridges platform, sponsored by Paratus and consisting of mortgages originated by Foundation Home Loans.
Risk tone has been improving; however, we expect the primary market to remain relatively quiet towards the end of the year with issuers (especially those with non-conforming/buy-to-let collateral) evaluating their options in the private market and waiting for a more stable market.
Currently in 2022, there has been around £21bn of UK RMBS paper placed into the market compared to approximately £14bn at this time in 2021 and £13bn in 2020. This year, however, only around £9bn of that figure is from new originations, the remaining being large refinancing transactions of legacy assets.