The decision was approved by a majority of 6-3, with the dissenting members supporting a 0.25 per cent increase to 5.5 per cent. This is the third pause in the BoE’s hiking cycle and comes after fourteen consecutive rises from 0.1 per cent in December 2021. Meanwhile, swap rates have continued to tighten.
The bank’s current rate remains its highest in 15 years. The BoE maintained their cautious stance and tightening bias, with markets not anticipating any cuts to the base rate until at least May next year, contrasting sharply with the Federal Reserve opening the door to interest rate cuts in the new year. Sterling rose against the dollar following the announcement.
The changing economic landscape
The latest UK inflation data for the 12 months to October reported a fall to 4.6 per cent, largely attributed to declining energy prices, where the annual rate was the lowest since records began in 1950. The second largest downward contribution was from food and non-alcoholic beverages, which reached their lowest rate since June last year.
Core prices, however, were up 0.1 per cent month-on-month (MoM) and services inflation fell more softly than expected at -0.3 per cent MoM. Inflation is anticipated to fall more modestly in the November release, with market participants estimating a 0.2 per cent decline. In the BoE’s modal projection, inflation is expected to return to the two per cent target by the end of 2025.
UK GDP was flat in Q3 of this year, although MoM saw a fall of 0.3 per cent in October, with services, production, and the construction sector all experiencing a drop in output. GDP is now expected to remain flat in Q4 rather than the slight growth of 0.1 per cent previously anticipated.
Based on the latest surveys of bank staff, GDP is expected to see growth of c.0.25 per cent in 2024, weaker than previous predictions.
Falling swap rates
With inflation falling and the BoE rate believed to have reached the peak of the hiking cycle, swap rates have continued to tighten.
As a result, we are seeing lenders reducing their mortgage rates more regularly. For an average 75 per cent loan to value (LTV) mortgage, high street lenders are now offering two-year fixed rate products from 4.77 per cent and five-year fixed rate products from 4.58 per cent, the lowest rates we have seen since May of this year when they increased dramatically.
The UK labour market continues to show signs of weakening, with the number of vacancies decreasing on the quarter for the 17th consecutive period, the longest continuous decline ever recorded. Growth in regular pay, not including bonuses, was up by 7.3 per cent in the three months to October, a fall from the recent highs we have seen.
Unemployment, however, was largely unchanged on the quarter at 4.2 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* | 5.25 per cent | 5.14 per cent | 4.84 per cent | 3.91 per cent | 3.34 per cent | 3.21 per cent |
| Two-year fixed rate** | 4.20 per cent | 4.05 per cent | 3.83 per cent | 3.53 per cent | 3.27 per cent | 3.18 per cent |
| Three-year fixed rate** | 3.91 per cent | 3.80 per cent | 3.65 per cent | 3.42 per cent | 3.23 per cent | 3.18 per cent |
| Five-year fixed rate** | 3.62 per cent | 3.55 per cent | 3.46 per cent | 3.32 per cent | 3.22 per cent | 3.22 per cent |
| 10-year fixed rate** | 3.49 per cent | 3.47 per cent | 3.43 per cent | 3.39 per cent | 3.38 per cent | 3.42 per cent |
* Using OIS Curve
**Based on the swap curve
The two-year swap rate is expected to fall far more quickly than previously expected, by just over 100 basis points (bps) over the next three years, with the curve flattening. The three and five-year swap rates are predicted to fall at a slower rate and stabilise at around 3.2 per cent.
This suggests that the market believes rates will stabilise for an extended period.
The 10-year swap rate is expected to stay very flat over the next year, decreasing by only 7bps over the next three years.
UK securitisation market
The UK securitisation market finished the year busier than usual throughout November with eight transactions pricing from four specialist lenders, two prime lenders, a legacy transaction, and one from Kensington’s own programme, Gemgarto 2023-1. The transactions all experienced strong engagement from investors, especially in the mezzanine tranches, with significant tightening from initial price talks (IPTs) and good coverage levels.
Kensington’s Gemgarto 2023-1 transaction, consisting of owner occupied, high LTV loans, was the first transaction from the issuer in over two years. The reception from markets was strong from the beginning of the process, across all offered tranches, resulting in high coverage levels for the Class B to E notes, respectively 5.1x, 6.8x, 5.0x, and 2.9x oversubscribed at IPTs. Coverage reached on average 4.3x at final terms, and pricing tightened on average by 40bps from IPTs.
The final levels across mezzanine notes ended up inside all recent UK residential mortgage-backed securitisation (RMBS) mezzanine notes placed by UK issuers this year.
In 2023, there has been just over £16.5bn of UK RMBS paper placed into the market compared to approximately £22bn at this time last year, although c.£12bn of that was legacy paper.
