While this is the seventh consecutive rise to the base rate, it is unlikely to be the last, with the market-implied path anticipating significant tightening over the coming months, with close to 300bps of cumulative tightening by next spring, i.e. with rates moving closer to 5 per cent. The next monetary easing is expected in the next meeting held in November and is forecast to once again rise by 50bps to 75bps.
Since the August meeting there has been a tumultuous backdrop with large movements in wholesale gas prices and the resultant increased inflation levels; GBP has also materially depreciated in that timeframe.
However, following the Government’s announcement of support measures to combat rising energy costs, inflation is likely to stabilise in the short term and provide some protection against further volatility.
UK inflation saw a slight drop from 10.1 per cent in July to 9.9 per cent in August and with the Government’s Energy Price Guarantee, inflation is not expected to reach the 13 per cent high as previously thought and new projections show a peak of around 11 per cent in October.
Growth slow, employment up, recession here
However, even with the Energy Price Guarantee, energy bills will increase from October and therefore inflation is expected to remain heightened at above 10 per cent into the new year. More monetary easing will be needed in the next two years to bring inflation sustainably back to the two per cent target.
UK GDP grew by 0.2 per cent in July, following a fall in June of 0.6 per cent, however it was flat in the three months to July compared to the previous three months and the outlook is projected to remain weak, with the UK expected to enter into recession.
The latest ONS figures show that unemployment continues to decrease, dropping to 3.6 per cent in the three months to July, the lowest rate since May to July 1974. In this same three-month period, the number of people unemployed for up to six months also decreased to a record low.
Regular pay (not including bonuses) continues to increase and was up 5.2 per cent among employees from May to July. Once adjusted for inflation, however, regular pay was shown to have declined by 2.8 per cent, among one of the largest falls in growth since comparable records began in 2001.
Overall, markets continue to predict a pessimistic broader macro-outlook in the UK for the remainder of the year and into 2023. The UK economy is now in recession.
| Forecast in rates | ||||||
| Effective Rate | One month’s time |
Three months’ time |
Six month’s time |
Twelve months’ time |
Two years’ time |
Three years’ time |
| Bank of England base rate* | 2.65 per cent | 3.61 per cent | 4.60 per cent | 4.88 per cent | 4.19 per cent | 3.66 per cent |
| Two-year fixed rate** | 4.49 per cent | 4.60 per cent | 4.63 per cent | 4.48 per cent | 3.92 per cent | 3.52 per cent |
| Three-year fixed rate** | 4.37 per cent | 4.42 per cent | 4.39 per cent | 4.21 per cent | 3.74 per cent | 3.39 per cent |
| Five-year fixed rate** | 4.02 per cent | 4.03 per cent | 3.99 per cent | 3.82 per cent | 3.46 per cent | 3.21 per cent |
| Ten-year fixed rate** | 3.52 per cent | 3.53 per cent | 3.51 per cent | 3.42 per cent | 3.26 per cent | 3.15 per cent |
* Using OIS Curve
**Based on the swap curve
Swap rates on the rise
Due to the economic backdrop, markets are expecting a steeper rise in the BoE base rate — closer to five per cent. Rates have not moved in the immediate aftermath of the BoE’s announcement given the 50bps-hike was already priced by the markets. However, they rose sharply the day after on the back of the mini Budget announcement from the government that included significant tax cuts higher than expected by the markets.
The two-year swap rate has jumped significantly over the last month and is now dangerously approaching the five per cent-mark with market participants anticipating it will remain around this level for the next 12 months’ and begin dropping back down during the expected UK recession; the three-year swap rate is due to follow the same pattern. The five- and 10-year swap rates are expected to remain relatively flat over the next 6 months, and slowly decline after that.
The UK Securitisation Market
Primary activity has picked up in September with three UK RMBS deals currently being marketed, although the markets remain bearish. On a positive note, the three deals that are currently on the markets are all using the traditional public broad distribution strategy while all deals since April were done via a preplacement strategy.
However, the Hops Hill deal sponsored by 24AM and collateralised by recent originations from Keystone was downscaled from £465 million to £250 million, evidencing a difficult bookbuilding process. In addition, the GS Parkmore deal backed by Kensington and Money Partners NPL legacy loans has not yet sent any updates, despite the deal having been announced weeks ago. A £500m STS prime deal from Yorkshire BS with a Social label accessed the market yesterday and we are yet to see any update.
Risk tone has continued to improve at the beginning of the week despite ongoing headline volatility and macro uncertainty. We also saw a prime deal from Principality BS priced last week at S+67bps being six bps cheaper than the previous public prime transaction placed by Santander last July.
Currently in 2022, there has been approximately £20bn of UK RMBS paper placed into the market compared to approximately £13bn at this time in 2021 and 2020. This year, however, only around £8bn of that figure is from new originations, the remaining being large refinancing transactions of legacy assets.
