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Bank rate jumps 50bps as inflation holds firm – Maddox

by: Alex Maddox, capital markets director at Kensington Mortgages
  • 26/06/2023
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Bank rate jumps 50bps as inflation holds firm – Maddox
The Bank of England’s (BoE) Monetary Policy Committee (MPC) raised interest rates by 0.5 per cent to five per cent on Thursday.

This was a higher increase than expected by most economists, which exposed a lack of understanding among markets of the BoE’s outlook. The decision was approved by a majority of seven to two, with the minority, in stark contrast, preferring to maintain the rate at 4.5 per cent. The MPC said that further rate rises could be necessary to bring inflation back under control.  

This is the 13th consecutive hike to the base rate, which has risen from 0.1 per cent in December 2021, and is the highest rate in 15 years. Due to persistent high inflation, the market is pricing in further hikes this year, with a likely 25bps hike in August and a projected terminal rate of 5.75 per cent in November, up from five per cent previously. Nevertheless, further data surprises on inflation could lead to another 50bps hike in August.  

The latest UK inflation data for the 12 months to May was flat from April figures at 8.7 per cent, with overall inflation falling at a far slower rate than anticipated. Services inflation jumped 0.5 per cent in May to 7.4 per cent with airfares and package holidays contributing to the increase. Core goods price inflation was much stronger than anticipated, although this is expected to decrease as supply chain costs fall over the course of the year. Similarly, food price inflation has started to decline and is expected to drop further in Q2 of this year. Wage inflation and a tight labour market are also having a significant impact on the results.  

In the MPC’s latest Market Participants Survey, predictions are that inflation will decline to just over 2.2 per cent in three years’ time. 

UK GDP for Q2 of this year is expected to be moderately stronger than previously predicted, following a slightly weaker than anticipated Q1 result, with current estimates expecting growth of 0.1 per cent. Taking a broader view, UK GDP is predicted to increase around 0.25 per cent in 2023. 

Due to the sharp rise in rates, new mortgage rates have rocketed with high street lenders offering an average 75 per cent loan to value (LTV), two-year fixed rate product from 5.6 per cent, and similar five-year fixed product from 5.1 per cent (all rates are dependent on LTV and product fees). Due to the latest hike from the BoE, we expect these rates to increase further. 

The UK labour market continues to be very tight, with the unemployment rate remaining broadly flat at 3.8 per cent in the three months to April.  

The number of people in employment increased to a record high in the latest quarter with increases in both the number of employees and self-employed workers. Labour demand has continued to ease with the number of vacancies falling over the quarter for the 11th consecutive period. Growth in regular pay, not including bonuses, was up by 7.2 per cent in the three months to April. Although this is a 1.3 per cent decline once adjusted for inflation, it is the largest growth rate seen outside of the coronavirus pandemic. 


   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*  5.00 per cent  5.53 per cent  5.91 per cent  5.69 per cent  4.76 per cent  4.25 per cent 
Two-year fixed rate**  5.55 per cent  5.53 per cent  5.41 per cent  5.12 per cent  4.50 per cent  4.06 per cent 
Three-year fixed rate**  5.28 per cent  5.23 per cent  5.11 per cent  4.83 per cent  4.29 per cent  3.91 per cent 
Five-year fixed rate**  4.78 per cent  4.73 per cent  4.63 per cent  4.40 per cent  4.00 per cent  3.74 per cent 
10-year fixed rate**  4.15 per cent  4.13 per cent  4.08 per cent  3.96 per cent  3.78 per cent  3.67 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 three and five-year swap rates predicted to follow the same pattern. All are falling at a far slower pace than previously thought.  

The curve has steepened slightly with the 10-year swap rate anticipated to stay relatively flat over the next year, decreasing by 48bps over the next three years. 


UK securitisation market 

The UK securitisation market has been quieter over the last few weeks in the lead up to the Global ABS conference, with the majority of the market attending last week. The conference was the busiest yet with over 5,000 market participants attending. The key concern of market participants is the potential for deterioration of credit performance. On the back of the positive general mood of the conference, two transactions decided to access the market this week, an owner-occupied only first lien transaction from Paratus (Foundation Home Loans) and a mixed owner-occupied and buy to let transaction of first lien loans from Together.  

This year so far, there has been just over £8bn of UK residential mortgage-backed securitisation (RMBS) paper placed into the market compared to approximately £16bn at this time last year, although circa £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 40 per cent of the specialist volumes we saw at this time last year. 


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