Improved economic outlook could see base rate rise to 0.25 in a year – Maddox

Improved economic outlook could see base rate rise to 0.25 in a year – Maddox

 

The committee also voted unanimously for the BoE to maintain the stock of sterling non-financial investment-grade corporate bond purchases at £20bn and held the total volume of quantitative easing (QE) at £895bn overall.  

Global GDP rose sharply in Q2 2021 due to successful vaccination programmes and further easing of restrictions. UK GDP is expected to have risen by five per cent in upcoming results for Q2 2021, four per cent below its pre-pandemic level.  

However, this is stronger than previously estimated. It’s anticipated that UK GDP growth will be slower in Q3 2021 at around two per cent, due to the recent increase in coronavirus cases, but is expected to recover by the end of the year. 

Following a large increase in April and May, once restrictions started to ease, household spending remained broadly flat in June and July – close to pre-pandemic levels. As expected, there was a surge in property transactions in June due to the rush to meet the first phase of the stamp duty holiday deadline on 30 June 2021.  

Inflation rose to 2.5 per cent in June year-on-year, above the MPC’s two per cent sustainable target, higher than expected in May’s report and markets predict it will rise to four per cent in Q4 2021, before falling back closer to the two per cent target.  

The latest Office for National Statistics (ONS) unemployment figures indicate that unemployment has remained relatively stable in recent months and stood at 4.8 per cent in the three months to May 2021. It remains to be seen whether this stability continues with the end of the government Coronavirus Job Retention Scheme (CJRS), at the end of September.   

Latest figures for the CJRS show that there were still 1.9 million employees on furlough, a decrease of around 590,000 from the end of May. 

  

   Forecast in rates (changes rounded to nearest 0.25 per cent) 
Effective Rate  1mth time  3mth time  6mth time  12mth time  2yrs time  3yrs time 
Bank of England Base Rate*        0.250  0.250  0.250 
2yr Fixed Rate**  0.500  0.500  0.500  0.500  0.750  0.750 
3yr Fixed Rate**  0.500  0.500  0.500  0.500  0.500  0.750 
5yr Fixed Rate**  0.750  0.750  0.750  0.750  0.750  0.750 
10yr Fixed Rate**  0.500  0.750  0.750  0.750  0.750  0.750 

*Using OIS Curve 

**Based on the swap curve 

  

With the BoE base bate remaining at its record low of 10 basis points (bps), the markets have suggested that the borrowing rate will remain flat over the next six months.  

Still, due to an improved recovery projection of the economy, it’s predicted there will be a rate increase to 25 bps earlier than expected, within the next 12 months.  

The forecast for the base rate in two and three years’ time has also moved, with an expectation that once the rate increases to 25 bps, it will remain flat at this level for the next 24 months. 

In line with a slower than expected increase in the base rate, the two-year swap rate is not likely to rise for up to two years and will then increase to 75 bps.  

The three-year swap rate is expected to remain flat over the next two years and then increase to 75 bps in year three. For five and 10-year swap rates, the long-term rate will likely increase to 75 bps in the short-term, and then remain flat over the next three years. 

  

UK securitisation market 

The UK RMBS primary markets have slowed down for the summer break, with the last transactions seen in the market towards the end of July. Over the last year, more than £10.7bn of UK RMBS paper has been placed into the market. 

 

Strong GDP growth indicates slow and steady path for interest rate rises – Maddox

Strong GDP growth indicates slow and steady path for interest rate rises – Maddox

 

MPC members all also backed maintaining the stock of sterling non-financial investment grade corporate bond purchases at £20 billion, and held total volume of quantitative easing at £895 billion overall. 

 

Faster-than-expected recovery

Since May’s meeting, growth in gross domestic product (GDP) globally has been stronger than anticipated. The expected level of UK GDP in Q2 2021 is now 1.5 per cent above what was previously predicted.  

June is expected to be about 2.5 per cent below its pre-Covid Q4 2019 level. A faster recovery has been in large part due to consumer-facing services, as restrictions eased from April onwards. 

Twelve-month consumer price index (CPI) inflation rose from 1.5 per cent in April to 2.1 per cent in May, above the MPC’s two per cent target and earlier than predicted. Inflation is expected to rise further and is likely to exceed three per cent for a short period this year, primarily due to developments in energy prices.  

The MPC predicts that there will be a period of strong GDP growth and above-target inflation, after which inflation will fall back in line. 

The latest unemployment figures from the Office for National Statistics indicate that unemployment has dropped slightly in recent months and stood at 4.7 per cent in the three months to April 2021.  

Also, the number of jobs furloughed under the Coronavirus Job Retention Scheme (CJRS) has continued to drop with 3.6 million jobs furloughed in April, dropping to below two million in May and around 50 per cent of those are on a flexible form of furlough. 

 

Rate predictions 

Forecast in rates (changes rounded to nearest 0.25 per cent) 
Effective Rate  1mth time 3mth time 6mth time 12mth time 2yrs time 3yrs time
Bank of England Base Rate*       

0.250 

 

0.500
2yr Fixed Rate**        0.250  0.500  0.750 
3yr Fixed Rate**  0.500  0.500  0.500  0.750  0.750  1.000 
5yr Fixed Rate**  0.500  0.500  0.500  0.500  0.750  0.750 
10yr Fixed Rate** 0.500 0.750 0.750 0.750 1.000 1.000

* Using OIS Curve 

**Based on the swap curve 

 

With the Bank of England Base Rate currently held at its very low, 10 bps level, the markets have suggested that the rate will remain flat over the next year whilst the economy continues to recover and will then start to rise in two years.  

However, this rise is predicted to be slower than previously expected, with the base rate rising to 25 bps then 50 bps in two and three years respectively. 

Forecasts remain wholly unchanged for the two-year and three-year fixed rates staying flat over the next six months before beginning to rise towards the end of this year.  

The two-year fixed rate is set to increase from 25 bps to 50 bps in twelve months and to 75 bps in two years, and the three-year fixed rate to increase to 75 bps in 12 months’ time and then to one per cent in three years. In respect of the five-year rates, it’s expected that the long-term rate will increase to one per cent in two years. 

 

UK securitisation market 

The UK residential mortgage backed securities (RMBS) primary markets have been a lot more active over the last few weeks with six issuances into the market since mid-May, one from a prime lender and the remainder from the specialist market, including Kensington’s own inaugural green bond, the first Green UK RMBS issuance. 

Year-to-date there have been over £9.7 billion of UK RMBS paper placed into the market. 

BoE holds base rate at 0.1 per cent

BoE holds base rate at 0.1 per cent

 

This is despite inflation rising above the committee’s two per cent target. In May, CPI inflation increased from 1.5 per cent to 2.1 per cent. 

Inflation is forecast to rise temporarily above target to three per cent due to increases in energy prices. However, in the medium term, inflation is expected to return to around two per cent. 

The MPC predicted UK GDP to recover to pre-pandemic levels this year largely due to the return of consumer-facing services and the easing of restrictions. 

June’s output is expected to be 2.5 per cent below pre-pandemic levels but this was a 1.5 per cent down-revision from the MPC’s prediction last month. 

Alex Maddox, capital markets and digital director at Kensington Mortgages, said: “Everyone is trying to work out if the inflation increase is temporary or here to stay.  

“By keeping rates constant, the MPC is suggesting it’s the former. Economic growth is returning at pace as the economy returns to normal, but the risk of restrictions lasting longer due to the delta variant may well have swayed the MPC to hold off for a little longer.” 

‘BoE will not enter negative territory and instead begin to increase rates in 2022’ – Maddox

‘BoE will not enter negative territory and instead begin to increase rates in 2022’ – Maddox

 

The BoE also held the total volume of quantitative easing (QE) at £895bn. As expected, given the BoE is ahead of target for its asset purchases programme, the MPC decided to slow down the pace of bond purchases.

In a nutshell, the MPC shifted up its economic outlook given higher consumer spending, the continued progression of the vaccine rollout programme, the low numbers of new COVID cases in the UK and the easing of restrictions on economic activity. Markets expect growth to be stronger than previously anticipated, with unemployment lower than initially forecasted and inflation broadly stable. The recent improvement in the economic and coronavirus outlook strongly suggest that the BoE will not enter negative territory and instead begin to increase rates in 2022, subject to the 2 per cent inflation target being met.

UK GDP fell by 1.5 per cent in Q1 2021, which is less than previously anticipated in the February 2021 report, with March’s GDP growth exceeding expectations at 2.1 per cent. GDP is also expected to rise sharply in Q2 2021 due to the rebound of the economy. However, activity in the quarter is still approximately five per cent below its levels in Q4 2019. The MPC expects 2021 GDP to expand by 7.25 per cent this year – the highest rate in more than 70 years – from February’s estimate at five per cent. This would bring GDP back to its pre-virus levels a quarter earlier than expected. In 2022, the MPC lowers its projection for growth to 5.75 per cent, from its earlier prediction of 7.25 per cent.

 

Jobless numbers

The latest ONS unemployment figures indicate that unemployment has stabilised in recent months and stood at 4.9 per cent in the three months to February 2021. The two key schemes to support the UK workforce, the Coronavirus Job Retention Scheme (CJRS) and the Self-Employed Income Support Scheme (SEISS), have had further extensions until 30 September 2021, which is likely helping to flatten the curve. The MPC now projects unemployment to peak under 5.5 per cent from February’s estimate of 7.75 per cent. Beyond 2021, the MPC expects the unemployment rate to track below five per cent, landing closer to 4.25 per cent in Q4 2023.

 

The rates outlook

Forecasts suggest that the two-year and three-year fixed rates will remain flat over the next six months before beginning to rise towards the end of this year. With the two-year fixed rate set to increase from 25 bps to 50 bps in twelve months and 75bps in two years, the three-year fixed rate will increase to 75bps in twelve months and one per cent in three years. Regarding five-year rates, markets expect the long-term rate will increase to one per cent in two years.

 

UK securitisation market

Primary markets have been very quiet since Easter, with only one deal from Fleet Mortgages. We expect primary volumes to pick up in the next couple of weeks. Due to the lack of paper in the primary market, the secondary market spreads have been tightening week-on-week over the past month.

Base rate held as BoE predicts stronger economic recovery

Base rate held as BoE predicts stronger economic recovery

 

This was up from five per cent growth forecast in February. 

The Bank attributed its revised prediction to the UK’s vaccination program, which it said, “was helping the UK economy to recover rapidly”. 

The MPC said low interest rates supported households and businesses by keeping the cost of borrowing cheap. As a result, the committee expects the ongoing low rate to help in meeting its two per cent inflation target this year. 

It predicted the base rate would be held at 0.1 per cent until Q2 2023, when it would rise to 0.3 per cent. By Q2 2024, the base rate is expected to be 0.6 per cent.

The Bank maintained quantitative easing at £895bn. 

With employees expected to return to work once the Coronavirus Job Retention Scheme ends in September, the Bank said, along with an improvement in the economy, it had reduced its projection for near-term unemployment to 5.4 per cent. 

 

Boost of confidence

Frances Haque, Santander UK chief economist, said: “The MPC’s decision to leave Bank Rate unchanged at 0.1 per cent was expected given the path for lifting restrictions continues on track, along with a fall in infection rates supported by the swift rollout of the Covid-19 vaccination programme 

“Both will help boost confidence and support growth in the UK economy which is reflected in the updated forecasts in the Monetary Policy Report published today.”   

She added: “However, risks to the forecast remain both from the emergence of different virus variants as well as the possibility of increasing inflation.  

“On that basis the Bank remains committed to intervening should the financial markets and the UK economy need additional support measures as we move through the rest of the year.” 

Base rate to remain at historical low until 2025 – Capital Economics

Base rate to remain at historical low until 2025 – Capital Economics

 

The consultancy’s latest UK housing market update concluded this would combine with other low-rate scenarios across the mortgages sector. 

Capital Economics said sustained low, short-term borrowing rates indicated mortgage rates would remain suppressed, or even fall in the medium term, avoiding a post-Stamp Duty holiday house price crash. 

The report said this would happen despite an increase in 10-year gilt yields from 0.2 per cent in December to 0.8 per cent now. 

Also, if gilt yields increase to 1.5 per cent by the end of 2022 as expected, they would still be below average rates seen over the last decade. 

 

Market to cool, but no price fall predicted

The rate at which banks borrow from wholesale funding markets has fallen since the base rate was cut to 0.1 per cent, but the reduction has not been passed to borrowers.  

Instead, interest margins were increased during the pandemic to offset a potential economic slowdown and drop in house prices. 

However, banks could reduce their risk margins in the future and improve lending appetite amid strong housing demand. The report noted this was already happening with lenders returning to the high loan to value market and product rates falling within this bracket.  

Confidence in the economy could also return after a recent IHS Markit/CIPS survey indicated a rise in employment figures in March. 

Meanwhile, long-term interest rates are expected to keep rising, following a surge from 0.28 per cent a year in January, to 0.56 per cent in February. 

This could impact the amount investors are willing to pay for houses, because a rise in risk-free rates results in more rental yield being required for valuable property investments. 

However, this was not expected to drive a decline in house prices. Capital Economics said the private rental sector was made up predominantly of amateur landlords who tend to value capital growth over rental yield. 

The report said: “Putting this all together with our forecast that Bank rate will remain at 0.10 per cent until 2025, we suspect mortgage rates will drop a little further in the near term and stay low even if gilt yields continue to rise.  

“Even so, we suspect the housing market will cool when the stamp duty holiday ends. But the cushion of very low mortgage rates should prevent a fall in prices.” 

Markets no longer expecting negative interest rates from BoE – Maddox

Markets no longer expecting negative interest rates from BoE – Maddox

 

The BoE also held the total quantitative easing (QE) target at £895bn, with the pace of asset purchases remaining unchanged at £4.4bn a week.

Overall, the MPC’s “wait and see” approach continues, with the view that its next steps largely depend on the recovery of the UK economy.

To this end, we can expect further policy action if the markets worsen or inflation decreases below the two per cent target.

The MPC noted the positive attribution of the vaccine rollout and noted that the easing of Covid restrictions would increase the UK economy’s supply and demand over the coming months.

UK GDP fell by 2.9 per cent in January 2021, although this reduction was lower than expected and generally due to developments in public sector output.

However, GDP remains approximately 10 per cent lower when compared to Q4 2019, but had risen by one per cent in Q4 2020, which was slightly stronger than expected in the February report.

The 12-month Consumer Price Index (CPI) inflation measure rose from 0.6 per cent in December to 0.7 per cent in January, with a slight uptick attributed to recreation and culture.

The MPC suggested CPI inflation is expected to be above the BoE’s two per cent target by spring, as the effects of previous falls in oil prices will drop out of the annual comparative figures, reflecting recent increases in energy prices.

The February report does not account for Budget policy updates such as extending furlough, resulting in higher unemployment projections and latest Office for National Statistics figures indicate unemployment was at 5.0 per cent in the three months to January 2021.

 

No negative interest rates

The market is no longer expecting the BoE to cut interest rates below zero and expects the BoE base rate will increase to 25 basis points (bps) in two years and then to 50bps in three years.

Generally, interest rates have been on an upward trend across the curve, with two-year and five-year rates increasing by 14bps and 36bps respectively since the end of January 2021.

Forecasts for two-year swap rates will increase to 50bps in a years’ time and then 75bps in two years, with three-year rates predicted to reach 0.75 per cent in two years and then one per cent in three years.

Five-year rates are expected to hit one per cent in two years, with 10-year rates reaching one per cent in six months’ time and then 1.25 per cent in three years’ time.

At this stage, market participants believe the likelihood of further stimulus from the BoE is diminishing.

The MPC’s view is unchanged since the last meeting, in that the next steps will depend on the recovery of the UK economy.

There was an expectation previously that a negative rate would be imminent. However, the MPC has steered clear and is awaiting the UK’s recovery before proceeding with its next steps.

As such, looking ahead, the likelihood of a rate cut in 2021 is thought to be materially lower and markets expect the policy to remain unchanged for the current year and next year.

 

 

 

UK Securitisation Market

Primary markets were very active and healthy in February and March, with a flurry of new issuances from various mortgage lenders, including Together Money, Belmont Green, Paratus, Fleet Mortgages, Landbay and Yorkshire Building Society.

Together brought the first deal backed by commercial loans in 14 years and YBS the first UK prime deal since last summer.

We also saw an active pipeline of legacy trades with the £4bn portfolio sold by UKAR to the PIMCO/DK Partners/Citi consortium being refinanced, with seniors pricing at the very healthy print of S+80bps.

And both Trinity Square transactions were refinanced into a single £1.1bn deal with seniors at S+85bps.

Since the beginning of February, more than £7bn of UK residential mortgage backed securitisation (RMBS) paper has been placed on the market, evidencing a functioning market’s return.

 

 

Bank of England holds base rate at 0.1 per cent

Bank of England holds base rate at 0.1 per cent

 

The committee concluded its current monetary policy stance remained appropriate in achieving the two per cent inflation target by spring and managing the potential risks of the pandemic on the economy.

Since its meeting in February, the central bank noted global gross domestic product (GDP) growth was stronger than expected. Today, Fitch Ratings predicted global GDP to increase by 6.1 per cent in 2021, up from previous predictions of 5.3 per cent.

UK GDP growth was also not as weak as forecast, with a 2.9 per cent decline recorded in January. Compared to the previous quarter, this was a one per cent rise. 

The committee also said vaccination programmes and a drop in Covid-19 infection rates indicated restrictions would be lifted sooner than predicted in last month’s MPC report 

Along with support measures announced in the Budget, the committee said this would result in stronger consumption growth in Q2 than previously thought. 

The unemployment rate was also forecast to be more moderate than anticipated because of the extension of government support schemes. 

The MPC said it continued to monitor the economic situation and if the outlook for inflation weakened, it was prepared to do what was necessary achieve the goal of returning to two per cent.  

Frances Haque, Santander UK chief economist, said: “The MPC’s decision to leave Bank Rate unchanged at 0.1 per cent was expected this month given the rapid rollout of Covid-19 vaccines along with the path for lifting restrictions remaining on track. Both will help boost confidence and support growth in the UK economy.   

“However, the Bank of England remains committed to intervening should the financial markets and the UK economy need additional support measures as we move through 2021.” 

 

Markets predict negative rates in 2022 despite six-month warning – Maddox

Markets predict negative rates in 2022 despite six-month warning – Maddox

 

The BoE also held the total quantitative easing (QE) target at £895bn.

The MPC gave a hawkish tone, with the biggest takeaway being that the committee agreed to give lenders a six-month notice period to prepare for negative interest rates – the first time in its history. This suggests that August 2021 could be the earliest date where negative rates can be expected, by which point there are hopes that the UK economy may be able to reopen.

However, the MPC also highlighted that “this did not mean that negative rates were on the way” – so the position is speculative in any event. The BoE has been studying the case for negative rates for almost a year.

 

Economic recovery by 2022

UK GDP figures out today have risen slightly by one per cent in Q4 2020 compared to the previous quarter, but this is still 7.8 per cent lower than Q4 2019.

Despite avoiding a double dip recession – the total UK economy shrunk by almost 10 per cent in 2020 – the largest contraction in 300 years.

While the MPC expects UK GDP to contract by around four per cent in Q1 2021 due to the lockdown measures, it is projected that it will bounce back strongly in the months after.

The MPC noted GDP is projected to recover rapidly over 2021, as the vaccination programme will lead to easing of Covid restrictions and health concerns, with a 7.25per cent annual rise in 2021.

The MPC expects UK GDP to return to its pre-COVID levels in early 2022 rather than late next year.

It also indicated that the recovery in spending would be stronger because of consumers building up cash during lockdown. Between March and November 2020, households held over £125bn more cash than they usually would, according to the BoE.

Twelve-month CPI inflation rose from 0.3 per cent in November to 0.6 per cent in December. The weakness of recent outturns largely reflects the direct and indirect effects of Covid-19 on the economy.

CPI inflation is expected to be above the BoE’s two per cent target by Q1 2022, as the reduction in VAT for certain services comes to an end.

Despite the extension of the furlough scheme, the latest ONS figures show unemployment has hit a four-year high at five per cent and a further increase in unemployment is projected over the next few quarters.

 

Negative rates delayed

The market is expecting the BoE to cut interest rates below zero next year, for the first time ever. The market expects that the BoE base rate will fall to negative 25 basis points (bps) in 12 months’ time and return to zero in two years’ time.

Forecasts for the two-year rates and three-year rates will fall to zero and then increase to 25 bps in twelve months’ time.

Five-year rates remain at 25bps for the next two years and are expected to increase to 50 bps in three years, and 10-year rates to remain at 50bps for two years, then increase to 50bps in three years’ time.

Market participants believe at this stage, given that UK growth is in line to return to pre-pandemic levels, that the likelihood of further stimulus of the BoE is diminishing.

The MPC has reviewed its negative rate policy and highlighted that it is “not warranted by the current conjuncture and the outlook”.

Looking ahead, the likelihood of a rate cut in 2021 is seen as materially lower. For now, markets forecast the policy to remain unmoved this year and next.

 

UK Securitisation Market

The UK residential mortgage-backed securitisation (RMBS) market strongly reopened with the issuances of three transactions to date – all from specialist lenders.

We expect the pipeline for UK prime paper to remain dry as high street banks continue to benefit from cheap funding from the BoE via the term funding scheme (TFS) launched last year.

Kensington brought the first labelled environmental, social and corporate governance (ESG) bond in the UK RMBS market at the beginning of February.

This is a landmark transaction hopefully set to be followed by other social bonds as the securitisation market catches up to other capital markets which have more readily adopted ethical frameworks.

 

 

Base rate should ‘immediately be cut to -3 per cent’ – Star Letter 15/01/2021

Base rate should ‘immediately be cut to -3 per cent’ – Star Letter 15/01/2021

 

This week’s comment came from Paul Barrett, who was responding to the article: There are ‘lots of issues’ with negative interest rates – Bailey 

He said: “The Bank of England should immediately reduce rates to -3 per cent. If things start to get better, then increases can occur. 

“The UK economy is in the toilet being kept afloat by massive taxpayer subsidy of quantitative easing and furlough. These rates should be kept for decades just like they were in Japan.

“The government should do all it can to persuade people to get into debt and spend. Negative interest rates are needed to reduce costs for the consumer.”