Better Business
BoE raises rates again as mortgage market begins to stabilise – Maddox
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Alex Maddox, capital markets director at Kensington MortgagesAll eyes this week were on interest rate decisions from central banks in the EU, UK, and the US, with rate hikes of 50 basis points (bps) across the board.
The Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted by a majority of six to three to increase the borrowing rate by 50bps to 3.5 per cent. Two members preferred to maintain the rate at three per cent and one member voted to increase the base rate by 75bps to 3.75 per cent. The 50bps hike was in line with market expectations and was the ninth consecutive rise to the base rate.
The latest UK inflation data surprised by falling more than expected to 10.7 per cent in November, down from 11.1 per cent in October, and is projected to decline gradually during the first quarter of 2023, with the earlier increases in the prices of energy and other goods falling out of the annual comparison. Also, most indicators for global supply chain bottlenecks suggest that they have now eased, which should help stabilise goods prices.
Nevertheless, the MPC noted that the outlook for the UK economy remains uncertain and that it will not hesitate to increase rates further if inflationary pressures do not subside.
New mortgage rates have decreased slightly since the November meeting, following their sharp increase at the end of September. Although they remain far higher than the levels borrowers have become accustomed to, we expect them to now stabilise at current levels (c.five to six per cent) for the foreseeable future.
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The wider economy
UK GDP is estimated to have declined by 0.1 per cent in Q4. While a softer decline than expected, the Q4 figure following a reported drop in Q3 of 0.2 per cent would suggest that the UK has entered recession. This is despite monthly GDP in October showing a strong rebound, rising 0.5 per cent month-on-month. Overall, UK GDP is expected to have grown by 4.2 per cent in 2022 and is predicted to decline by 1.4 per cent in 2023 before recovering in 2024.
Although the labour market remains tight, labour demand has begun to ease, with the latest ONS figures showing that unemployment has increased slightly, moving to 3.7 per cent in the three months to October. Regular pay (not including bonuses) continues to increase and was up 6.1 per cent in August to October. Once adjusted for inflation, however, regular pay was shown to have declined by 2.7 per cent.
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* | 3.65 per cent | 4.14 per cent | 4.51 per cent | 4.32 per cent | 3.59 per cent | 3.41 per cent |
Two-year fixed rate** | 4.19 per cent | 4.18 per cent | 4.09 per cent | 3.86 per cent | 3.50 per cent | 3.33 per cent |
Three-year fixed rate** | 3.99 per cent | 3.97 per cent | 3.89 per cent | 3.71 per cent | 3.41 per cent | 3.22 per cent |
Five-year fixed rate** | 3.72 per cent | 3.69 per cent | 3.63 per cent | 3.47 per cent | 3.23 per cent | 3.10 per cent |
10-year fixed rate** | 3.36 per cent | 3.35 per cent | 3.32 per cent | 3.25 per cent | 3.15 per cent | 3.10 per cent |
* Using OIS Curve
**Based on the swap curve
Markets have calmed since the previous meeting, with the two-year swap rate having stabilised at 4.3 per cent after reaching almost six per cent at the end of September.
Markets, however, expect the rate to fall from next month, although the decline is anticipated to be very gradual over the next three years. The three and five-year swap rates are predicted to follow a similar pattern and are expected to converge slightly. The 10-year swap rate is anticipated to remain relatively flat over the next six months, before also slowly beginning to decline.
UK securitisation market
Although expected to be quiet until the new year, the market has seen two prime transactions in recent weeks: a prime simple, transparent and standardised (STS) owner occupied transaction from Nationwide Building society and a prime high loan to value (LTV) (>85 per cent original loan to value [OLTV]) transaction from Barclays Bank UK.
While the risk tone has been improving, we expect the primary market to remain relatively quiet until the end of the Christmas period as issuers look to the Q1 2023 window. Yet, without further transparency and certainty in the market, it is expected that private sounding prior to public announcement will continue to be a trend in the early part of 2023.
Currently in 2022, there has been around £22bn of UK residential mortgage backed securitisation (RMBS) paper placed into the market compared to approximately £17bn at this time in 2021 and £13bn in 2020. This year, however, only around £10bn of that figure is from new originations, with the remaining being large refinancing transactions of legacy assets.