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Economic outlook improves as BoE raises rates for tenth time – Maddox

by: Alex Maddox, capital markets director at Kensington Mortgages
  • 08/02/2023
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Economic outlook improves as BoE raises rates for tenth time – Maddox
Last week there were rate hikes across the board, however all were in line with market expectations.

The Bank of England’s (BoE) Monetary Policy Committee (MPC) members voted by a majority of seven to two to increase the borrowing rate by 50 basis points (bps) to four per cent, whilst two members preferred to maintain the rate at 3.5 per cent. The 50bps hike was in line with market predictions and BoE commentary has since had a more dovish outlook, suggesting a lower terminal rate of 4.25 per cent rather than the 4.5 per cent previously projected.  

This was the tenth consecutive rise to the base rate, from 0.1 per cent in December 2021.   


An improved environment

The latest UK inflation data has shown a continued downward trajectory with inflation hitting 10.5 per cent in the 12 months to December, down from 10.7 per cent in November. While still far from the two per cent target, inflation is expected to quickly fall this year with oil and gas prices having already declined due to a warmer winter across Europe, leading to lower energy demand than anticipated.  

The price of goods is also expected to stabilise as the production constraints caused by Covid lockdowns and the war in Ukraine continue to ease. 

New mortgage rates have been slowly decreasing since their sharp rise at the end of September, and with the BoE’s updated commentary we expect them to fall further this year, although not to the lows seen after the pandemic. On the high street, the main lenders are currently offering two-year fixed products from 4.6 per cent and five-year fixed products at less than four per cent (all rates are dependent on loan to value and product fees). 

UK GDP is estimated to have increased by 0.1 per cent in November, following a growth of 0.5 per cent in October, which contrasts with the previously expected decline. Taking a broader view, GDP fell by 0.3 per cent in the three months to November. Although a better-than-expected figure, the UK is still expected to enter recession this year with GDP predicted to shrink by 0.5 per cent in 2023. Nevertheless, it is now thought it will be much shorter and sharper than previous forecasts with the economy projected to rebound in 2024.  

The labour market continues to be tight, and unemployment remained unchanged at 3.7 per cent in the three months to November, with the number of employees also increasing. Labour demand has begun to ease slightly with the number of vacancies decreasing by six per cent, but vacancies remain at historically high levels. Regular pay (not including bonuses) continues to increase, up 6.4 per cent in September to November.  

Once adjusted for inflation, however, regular pay was shown to have declined by 2.6 per cent.   

   Forecast in rates 
Effective Rate  One month’s time  Three months’ time  Six months’ time  12 months’ time  Two years’ time  Three years’ time 
Bank of England Base Rate*  4.00 per cent  4.26 per cent  4.36 per cent  3.84 per cent  3.28 per cent  3.23 per cent 
Two-year fixed rate**  3.90 per cent  3.84 per cent  3.71 per cent  3.46 per cent  3.25 per cent  3.17 per cent 
Three-year fixed rate**  3.69 per cent  3.64 per cent  3.56 per cent  3.38 per cent  3.20 per cent  3.12 per cent 
Five-year fixed rate**  3.48 per cent  3.44 per cent  3.38 per cent  3.26 per cent  3.12 per cent  3.07 per cent 
10-year fixed rate**  3.28 per cent  3.26 per cent  3.24 per cent  3.18 per cent  3.14 per cent  3.14 per cent 

* Using OIS Curve  

**Based on the swap curve 

On the back of the dovish outlook from the BoE, the 2-year swap rate has fallen to under four per cent for the first time since September last year. It is expected to slowly decline over the next three years, with the three and five-year swap rates predicted to follow the same pattern. The 10-year swap rate is anticipated to remain relatively flat and decline by only 12bps in the next three years. 


UK securitisation market

The markets experienced a positive start to the year, with three prime transactions carried out by Coventry Building Society, Yorkshire Building Society, Santander, and a specialist buy-to-let transaction from Belmont Green (Vida Home Loans). There was also a large legacy transaction from Lloyds, however this was a new transaction involving a closed book of legacy UK mortgages from The Mortgage Business (owned by Lloyds) and was conducted by Lloyds for risk management purposes. 

To date this year, the market has been consistently supported by orderly and limited primary activity, with approximately one deal marketed per week, and there is a positive tone in the market, as evidenced by spreads tightening with each transaction. 

Due to higher spreads, however, there has been less paper placed into the market this year, especially from the specialist sector with only 14 per cent of specialist paper reported compared to the same time last year. Currently, there has been around £2bn of UK RMBS paper placed into the market compared to approximately £5.2bn at this time last year.  


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