BoE Monetary Policy Committee (MPC) members voted by a majority of seven to two to hike by a quarter of a percentage point whilst two members preferred to maintain the rate at four per cent. Although there has been market instability and volatility in global financial markets since the collapse of Silicon Valley Bank and the forced acquisition of Credit Suisse by UBS, the rise was in line with economists’ forecasts after better-than-expected UK GDP figures and a surprise jump in inflation.
This was the base rate’s 11th consecutive rise, with the hikes beginning in December 2021 from 0.1 per cent. For now, it is unclear whether the BoE will raise rates again at the next meeting in May.
This would depend on the level of inflation and the macro-economic outlook in the UK. Current market pricing implies one further rate increase by the end of the summer, peaking at around 4.5 per cent.
Unexpected economic developments
The latest UK inflation data has shown a jump to 10.4 per cent in the 12 months to February, up from 10.1 per cent in January but slightly lower than the 10.5 per cent December figure.
The surprise increase was largely attributed to the large rise in food costs, partly due to shortages of fresh produce. Food inflation currently stands at 18.2 per cent, the highest level seen since 1978. Alcohol prices in pubs and restaurants as well as clothing and footwear costs also contributed. Whilst the increase in the level of inflation was unexpected this month, the predictions for 2023 remain positive, with inflation still expected to fall sharply in Q3 as energy prices continue to be reined in by the government’s decision to maintain the support scheme to reduce household energy bills.
UK GDP is estimated to have increased by 0.3 per cent in January, following a fall of 0.5 per cent in December, and remained flat overall for Q4 2022. Taking a broader view, GDP is anticipated to be flat in Q1 of this year but is expected to grow slightly in Q2, in sharp contrast to the 0.4 per cent decline anticipated in the February report. As a result, the BoE suggested a technical recession in 2023 is no longer expected, a departure from last month’s predictions.
New mortgage rates continue to gradually decrease since their peak at the end of September, with high street lenders currently offering two-year fixed products from 4.2 per cent and five-year fixed products from 3.9 per cent (all rates are dependent on loan to value and product fees). While markets anticipate mortgage rates to continue falling this year from the highs of Q4 last year, we do not expect to see them return to the low levels to which we have become accustomed over the past decade.
Indeed, it is possible that the mortgage rates we are seeing now, may in fact be the new norm for the foreseeable future.
The labour market continues to be tight and unemployment remained unchanged at 3.7 per cent in the three months to January, with the number of employees also increasing. Labour demand continues to ease with the number of vacancies decreasing by five per cent between December 2022 and February 2023, with the economic outlook still a key cause for concern. Regular pay (not including bonuses) continues to increase, at 6.5 per cent from November to January. Once adjusted for inflation however, regular pay was shown to have declined by 2.4 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* | 4.25 per cent | 4.48 per cent | 4.59 per cent | 4.12 per cent | 3.64 per cent | 3.35 per cent |
| Two-year Fixed Rate** | 4.19 per cent | 4.13 per cent | 4.02 per cent | 3.81 per cent | 3.49 per cent | 3.19 per cent |
| Three-year Fixed Rate** | 3.99 per cent | 3.94 per cent | 3.85 per cent | 3.65 per cent | 3.34 per cent | 3.11 per cent |
| Five-year Fixed Rate** | 3.66 per cent | 3.62 per cent | 3.54 per cent | 3.39 per cent | 3.17 per cent | 3.01 per cent |
| 10-year Fixed Rate** | 3.30 per cent | 3.29 per cent | 3.25 per cent | 3.19 per cent | 3.11 per cent | 3.07 per cent |
* Using OIS Curve
**Based on the swap curve
The two-year swap rate 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 23bps in the next three years.
UK securitisation market
There has been exceptionally high volatility in the market over the last two weeks driven by worries about the wider banking industry and concern that soaring interest rates are eroding balance sheets across the financial sector. Nevertheless, market confidence has improved since then following the news of UBS taking over Credit Suisse.
The UK securitisation market was expected to be busy in the lead up to Easter. Yet, given macro developments and the significant market focus on events involving Silicon Valley Bank and Credit Suisse, it is possible that issuers may wait until after the Easter break, depending on market conditions settling. One can expect private syndicated deals may return as a pattern in primary markets on the back of reduced market uncertainty.
One transaction did come into the market just before the Silicon Valley Bank disruption: a specialist transaction from West One Loans involving a mixed pool of owner-occupied, buy to let, first lien and second lien loans. Currently, there has been around £3bn of UK residential mortgage-backed securitisation (RMBS) paper placed into the market compared to approximately £13bn at this time last year, although c.£10bn of that was legacy paper.
Due to wider market spreads, we have seen more prime issuances than specialist so far this year and only 24 per cent of the specialist volumes we saw last year.
