Markets expect no change to base rate for ‘at least two years’ – Maddox
Despite a fairly positive labour market, the Bank of England (BoE) indicated it was likely to scale back the number of base rate increases to a 0.25% rate hike over the next two years.
This decision was justified by the downgraded global and domestic economic outlooks and, of course, the acute uncertainty around Brexit.
Weak global growth
Brexit aside, the weaker than expected growth observed in the global economy, and particularly in Europe where growth dropped to just 0.2% in the final quarter of 2018, may well weigh on the UK.
Global growth has continued to slow down over recent months and the MPC is now expecting a sharper and more persistent slowdown than previously anticipated.
The UK’s GDP growth has also shown signs of weaknesses in early 2019 and the BoE has warned that the economy is on course for its weakest year since the global financial crisis.
January’s Purchasing Manager Index (PMI) readings were weaker than usual and house prices cooled again last month.
This news sent Sterling to a two-week low of around $1.29 USD ahead of the MPC meeting on 7 February.
Deal or no deal?
The BoE stressed that the performance of the economy would be highly dependent on how Brexit unfolds.
The economic impact of Brexit concerns is already being observed as UK businesses set up contingency plans and hold back on investments, which fell by 1.1% in Q3 of 2018.
The BoE also emphasised that these concerns were now spreading to UK households, leading to the softening of consumer confidence.
As a result of this, the BoE cut its near-term UK growth forecasts from 1.7% to 1.2% this year and from 1.7% to 1.5% in 2020 – meaning an increased chance of the UK sliding into recession this year.
However, it does expect activity to pick up towards the end of the year but the higher short-term volatility makes it unable to raise rates for now.
If an orderly Brexit does take place in the coming months, this could see the BoE restart its original plan of gradual but limited interest rises.
A no-deal Brexit, however, would likely see Sterling fall, causing a spike in inflation.
In such a scenario the BoE is not expected to rely solely on rate cuts and may well consider other monetary financing tools.
In light of these considerations, the markets forecast the BoE base rate to hold at 0.75% for at least the next two years, before rising to 1%.
The base rate will then remain at 1%, for the next year after that.
Similarly, the three-month LIBOR (London Inter-bank Offered Rate) is now expected to remain steady at around 1%, before rising after two years to 1.25%.
In the swap markets, the current market prediction is that two-year rates will stay at 1% for the next two years, rising to 1.25% after that.
Meanwhile, five-year swap rates are expected to remain at 1.25%, only rising to 1.5% after three years.
There looks set to be little change when it comes to 10-year swap rates: the rates are expected to stay at 1.25% for at least the next three years.
Northview Group closes £600m securitisation deal
The transaction was upsized during the process from an initial size of £420m.
The deal is the second-largest transaction secured by the recent originations of the Northview Group.
NVG has now securitised £4bn of mortgages since 2015, comprised of new originations issued by its Kensington Mortgages business.
The loans in the securitisation pool reflect the lending by Kensington Mortgages.
The average loan to value (LTV) at the time of the transaction was 73%, with a weighted average interest rate of 3.8%.
The pool included also 20% buy-to-let loans. Less than 1% of the borrowers in the portfolio securitised were more than one month in arrears at the time of closing.
There were no self-certified loans in the portfolio and only 30% of the mortgages were secured against properties in London and the South East.
Across all of Kensington’s lending since 2010, only 11 properties have been repossessed with a cumulative loss of £117,000.
Alex Maddox, capital markets and product development director (pictured), said that this transaction is further evidence of Northview’s strong track record in accessing the UK securitisation market, with the pricing and the large size a reflection of continued investor confidence in securities.
“High quality investors want access to the high-quality mortgage customers being sourced through Kensington’s unsurpassed underwriting.
“With the Bank of England bringing its crisis-era term funding scheme to an end, an increasing number of lenders have started to access the securitisation markets again as an alternative source of funding.”
Swap rates and Bank of England waiting for Brexit clarity – Maddox
At the last Monetary Policy Committee (MPC) meeting, governor Mark Carney reiterated the ‘gradual pace’ and ‘limited extent’ of tightening monetary policy.
However, with Consumer Price Index inflation still wavering above the 2% mark, markets expect rates to increase within the next few years. The exact timing, though, is unclear.
As ever, it’s until there is more certainty around a deal being agreed with the European Union and approve by parliament ahead of Brexit.
Brexit, Brexit, Brexit
Should the UK fail to negotiate a smooth transition with the EU, we may expect extraordinary measures from the Bank of England to protect the UK from a negative economic shock.
Again, it remains unclear what exact measures would be introduced, but Carney has emphasised that there is ‘little monetary policy can do’ to offset the impact of a no deal.
If a smooth transition is agreed, the Bank of England will likely tighten monetary policy faster than currently expected.
For now, the MPC has revised its GDP forecasts for the year and next downwards by 0.1% – from 1.4% to 1.3% in 2018 and 1.8% to 1.7% in 2019.
In terms of inflation, the Bank of England lowered its 2019 forecast from 2.2% to 2.1%, but current inflation for 2018 was revised upwards to 2.5%.
Despite record low unemployment at 4% and wage growth rising above 3% in August, markets remain gripped by Brexit.
In light of these considerations, the markets forecast the Bank of England base rate to hold at 0.75% for the next 12 months.
They then predict an increase of 0.25% to 1%, remaining there, before rising to 1.25% after three years.
The three-month London Interbank Offered Rate (LIBOR) is expected to rise sooner than the base rate, moving from 0.75% to 1% in the next month.
In the swap markets, current predictions for two-year rates are that they will stay at 1.25% for the next year, rising to 1.5% around the two-year mark.
Similarly, five-year swap rates will remain at 1.25%, rising to 1.5% in two years.
Lastly, 10-year swap rates are expected to remain at 1.5% for the next two years, before rising to 1.75% in three years’ time.
Kensington Mortgages hires Jayne Almond as chair
However, Breedon will be keeping his role as chair of holding company The Northview Group.
Additionally, Almond will also be joining The Northview Group as independent non-executive director.
She currently holds a number of directorships, including chair of Butterfield Mortgages and GKBK. She is also an honorary fellow at St Hilda’s College, Oxford University.
Almond worked at Lloyds TSB as managing director for European internet banking for four years and at Barclays Bank as director of business development for UK retail bank.
Breedon said that the team is thrilled to have Jayne Almond on board.
He added: “The specialist mortgage market is booming due to profound socio-demographic shifts, in particular, the rise of the self-employed and multiple income workers and an increase in demand for mortgages for over 55 year olds. Jayne’s appointment signals our desire to grow rapidly to meet this demand.”
BoE’s wait and see approach on rates continues as Brexit risks loom large – Maddox
The consensus for leaving rates unchanged comes despite more pronounced optimism from the Bank on the UK economy’s prospects.
It raised Q3 forecasts of growth from 0.4% to 0.5%, following 0.4% in Q2 and 0.6% in the three months to July.
Stronger consumer spending and UK wages rising faster than expected support its optimism. Average wages in the three months to the end of July were 2.9% higher than for the same period last year – the fastest growth in three years, and unemployment continued to fall in the last quarter.
At 4%, it is at its lowest since February 1975.
Moreover, the hold on interest rates came while inflation was still 2.5% in July – above the bank’s 2% target.
The MPC’s most recent economic projections, set out in the August Inflation Report, have it coming down to the target only in 2021.
Partly, the explanation for the MPC’s stance can be found in the two previous increases in rates in the last year – most recently in August.
At the same time, the 2.5% Consumer Prices Index (CPI) rate is actually 0.1 percentage points lower than projected, continuing a trend of CPI modestly undershooting forecasts since the start of 2018.
All about Brexit
Mostly, however, the bank’s reluctance to further raise interest rates is explained by Brexit.
As it put it: “The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.
“Since the committee’s previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.”
The bank’s aim therefore remains essentially unchanged from August – gradual and limited rate rises will hopefully return inflation to a stable 2% by the end of Q3 2021.
However, this is on the condition that there is a smooth exit from the European Union and an agreed trade deal.
Next rate hike in 2019
The markets are largely doing the same. Despite the uncertainty, they remain broadly optimistic.
Positive economic releases have lifted market sentiment, and the pound closed at its highest level for more than a month in mid-September at $1.31.
Market pricing still puts the next rate hike one-year ahead, although forecasts for base rates in two and three years’ time have risen since August, from 1.0% to 1.25%.
Again this is likely to be heavily dependent on Brexit.
Currently, markets put the probability of no deal at about 20% and a negotiated withdrawal agreement at about 60%.
Anything that substantially changes that estimation one way or another is likely to be reflected in future base rate forecasts.
Swap market shifts
In the swap markets, current market predictions put the two-year rate at 1.25% for the next six months, rising to 1.5% around the one-year mark (both estimates up 0.25% percentage points on last month).
Five-year swap rate predictions have increased similarly, to 1.5% up to a year, and thereafter to 1.75%.
And 10-year fixed rate swap forecasts remain unchanged at 1.5% for the next two years, but are then expected to rise to 1.75% in three years’ time.
Swap markets stable as base rate not expected to hit 1% for two years – Maddox
The August meeting was the last interest rate vote undertaken by Ian McCafferty, who retires from the committee at the end of this month and will be succeeded by Jonathan Haskel.
During the MPC meeting, the committee agreed to keep the stock of UK government bond purchases at £435m.
In June, the bank emphasised an “ongoing tightening of monetary policy”, yet the reasons for holding the rate at 0.5% then were linked to the slow growth of the UK economy in the first quarter, with GDP growth for the first three months of the year at a meagre 0.2%.
However, stronger economic data in Q2 was a big driver for the MPC to act on tightening monetary policy this month.
The MPC committee also revised upwards its forecasts for growth and inflation.
However, the Consumer Prices Index (CPI) forecasts from the August inflation report, despite being revised higher, remain only marginally above target, at +2.2% in 2019 and +2.1% in 2020.
The forecast expects inflation to finally come back below the 2% target mark in 2021.
Manufacturing bordering on recession
The short-term economic outlook for the UK continues to be uncertain.
On the one hand, the manufacturing sector is now bordering on a recession; on the other, construction and services were lifted by the heatwave in the three months up to June.
Meanwhile, the looming shadow of Brexit negotiations continues to cast uncertainty over the economy as a whole.
Mark Carney reiterated the “gradual pace” and “limited extent” of tightening. He also emphasised that the bank’s economic forecasts are conditional on a “relatively smooth transition” for Brexit.
Therefore, the market does not expect an aggressive pace of tightening in the near term, until there is more certainty around the Brexit negotiations.
Following the interest rate hike, UK markets are softer with the pound sterling hitting a one-year low of $1.27 against the dollar.
UK rates have also experienced a significant decrease across August; two-year swap rates peaked at 1.14 on the day of the rate’s hike and are currently trading within the 1.07-mark.
Three years to 1%
It is believed that UK markets failed to rally as a result of the continuing Brexit uncertainty and the neutral comments from Mark Carney after the announcement.
Due to the latest rate rise, the market does not expect any change in rates over the next 12 months. The borrowing base rate is expected to reach only 1.00% within three years.
In the swap markets, current market predictions expect the two-year rate to remain close to 1.00%, before rising to 1.25% in 12 months’ time and then 1.50% at the three-year mark.
Five-year swap rate predictions are at 1.25% for at least a year.
Similarly, market expectations have not changed for ten-year fixed swaps, which is predicted to stay at the 1.5% mark for at least two years.
Swap rates dip on back of MPC rate decision – Maddox
Despite markets long anticipating a May rate rise, the Bank of England’s Monetary Policy Committee (MPC) preferred to delay this increase until later in the year.
Weak economic data released shortly before May’s meeting caused the committee to vote in favour of keeping the base rate at 0.5%.
GDP figures showed that in the first quarter of 2018 the UK grew at its slowest rate in five years – growing only at +0.1%.
This slow growth in the early part of the year prompted the Bank of England to revise down its growth prediction for 2018 from 1.8% to 1.4%.
Despite the weak growth, the vote to keep the base rate at 0.5% was not unanimous.
Both Ian McCafferty and Michael Saunders were in favour of raising the rate to 0.75% – they were also the two members voting for a rate rise at the previous meeting.
Inflation appears to be coming under control as the central bank lowered its forecasts for both the short and medium term.
With inflation dropping to 2.5% in March (the lowest level since the beginning of the year) and the unemployment rate also lower, the Bank of England now expects inflation to reach 2.2% by the end of 2018 and to return to its 2% target within the next two years.
UK wage growth finally rose above inflation at +2.8% in the period between December and February.
Swap rates fall
Looking forward, the Bank of England said that the next rate rise would take place when there will be greater certainty on the UK’s negotiations with the European Union and stronger economic growth.
The market’s view is that will be at the end of this year since the expectation for the next rate rise is now the fourth quarter of 2018.
The two-year swap rate fell immediately following the MPC meeting, with trades now taking place around the 1% mark.
This is 5bps lower than just before the vote and well down on the 2018 peak – of 1.17% – which was recorded in the middle of April.
However, this is still well above December, when swap rates were trading around 75bps, following the raising of the base rate from 0.25% to 0.5%.
Rise within six months
Due to the unexpected decision to delay the base rate rise due to weak economic growth, the market now expects the next base rate rise of 0.25% will take place within the next six months.
The market expects the base rate to reach 1% within two years before rising to 1.25% in the following 12 months.
In the LIBOR (London Inter-Bank Ordinary Rate) market, predictions for the short-term remain the same, as LIBOR is expected to reach 0.75% in the next month and to hit 1% by the summer. However, looking 12 months ahead, the market anticipates LIBOR to be at the 1% mark, lower than the previous 1.25% prediction.
In the swap markets, the market expects the two-year swap rate to remain at 1% throughout the summer before rising to 1.25% at the turn of the year.
Five-year swap rates will remain at 1.25% for at least a year while 10-year fixed swaps are expected to be at the 1.5% mark for at least two years.
Know Your BDM: Chris Kirby, Northview Group
How many advisers and broker firms do you cover in your role?
I manage the Central West region, which is the West Midlands and most of Wales, so it’s a big area with a lot of brokers.
How do you successfully organise and deal with business on a daily basis?
Planning ahead is important. I allow time between my visits to enable me to have the flexibility to manage calls and email responses in a timely manner, and I’m a big user of outlook not just for appointments, but for other tasks on my to-do list.
What issues come up time and time again?
Every day throws up different challenges, which is part of the appeal of the job. As I work for a specialist lender, and the nature of the business we do tends to be more complex, the issues for want of a better word are down to this complexity. However, with a bit of drilling down, we’re able to get the answers we need.
What do you wish brokers understood about your job?
Brokers understand my role as their BDM quite well overall with regards to how accessible we are and when to expect a response to queries. If anything, it’s understanding that lenders have their own criteria for a reason, so sometimes we cannot help. However if it fits our criteria, we will always look to lend.
What do you think is the most important attribute of a good BDM?
Reliability. Whether that is getting back to brokers in a timely manner, or when you say you will, but also making sure the information you are providing is correct, as you don’t want to be wasting a broker’s time. Being able to say “No”, and occasionally delivering bad news are also important factors in building successful long-term relationships.
When you’re unavailable to be contacted by telephone, what’s the second-best way for brokers to get in touch?
Brokers can always send me an email, and I will respond as soon as I can, the same if they wish to leave a voicemail. Alternatively, I’d recommend contacting my colleagues in our business development unit, as they have a lot of experience and knowledge in relation to our policies and criteria and will be more than happy to help.
If you were head of the FCA for the day, what would you change about regulation in the mortgage industry?
I think the mortgage industry, especially the buy-to-let market (though regulated by the PRA), has seen considerable change over the last couple of years, so a period of stability would be welcome.
What was your motivation for choosing business development as a career?
I’ve always worked in customer facing roles, and I have an advisory background from my time with a previous lender, so business development seemed like the natural step to allow me to progress career wise, while maintaining that customer facing position.
How do you establish and maintain a good relationship with brokers?
Reliability, once again. I think also being straightforward with brokers and managing expectations about whether or not you think you can help their client. It’s important too, to ensure I not only know about a broker and their business, but know how they want to be supported, as for some, just being at the end of the phone when needed is all they’ll want, whereas others want a more face to face relationship. It’s tailoring your management style to suit each of the brokers and their businesses.
And how do you establish and maintain good relationships internally?
I like to pick up the phone and speak with my colleagues where possible, and when I am at our head office in Maidenhead, I try to spend time with different areas of the business who I work with. It is important to me that I understand and have a better appreciation of their roles and functions, and how we can work together more efficiently for brokers and their clients.
What’s the strangest question you’ve ever been asked?
“You don’t mind dogs do you?” – On its own a perfectly normal question, however, by the time it was asked an enormous great dane had already made himself comfortable on my lap, where he remained for the duration of our meeting, and was licking my face as if his life depended on it.
And finally, what did you want to be growing up?
Easy – a professional footballer. Fortunately for me, although I was a good if unspectacular player, I realised at a relatively early age I wasn’t going to make a living out of the game, so focused my energies on my studies, which has led me to where I am today.
Northview, Simplybiz, and Aldermore appoint senior roles – round-up
The Northview Group, whose brands include the Kensington, New Street, and Acenden, has appointed Mark Arnold to the role of the group’s chief executive officer.
Arnold will take on the role on 10 April 2018, and will replace Amany Attia, who announced her retirement in June 2017.
Previously, Arnold was executive in residence at private equity firm Centerbridge Partners, and had spent 18 years with GE Capital in a variety of senior management level roles.
Tim Breedon, executive chairman at the Northview Group, commented: “Mark’s broad experience will be key to supporting our strategy of continued mortgage lending growth, which through brands like Kensington Mortgages has been supporting underserved customers for over 23 years.
“We look forward to welcoming Mark on board in April.”
Arnold added: “Northview Group brands have built a great reputation in the specialist lending market over many years. The group has had a fantastic year and I am confident that my experience from around the globe will further support the ambitious growth plans that we have.”
Makayla Everitt (pictured) has been promoted to a newly created position of head of mortgages at Simplybiz.
Everitt joined Simplybiz in May 2012 as head of business development after a previous role at Natwest.
She is responsible for the growth and strategic direction of the business and will continue to report to the Martin Reynolds, chief executive officer of Simplybiz Mortgages.
Reynolds commented: “Makayala has been with the business for nearly six years and during this time she has been instrumental in the growth of its proposition.
“Her focus on enhancing our members’ business opportunities whilst keeping them and their clients protected with our compliance proposition has been well received.”
Aldermore has appointed Sue Hayes to the newly created position of group managing director, retail finance.
Hayes joined in June, and will now be responsible to managing the bank’s existing mortgages and savings businesses, as well as looking for expansion into new areas.
She was previously managing director of premier and community segments and savings products at Barclays. Prior to the Barclays role, Hayes worked at Santander, RBS, and Halifax Bank of Scotland, where she held various senior roles across retail and commercial banking.
Phillip Monks, chief executive officer of Aldermore, said: “Aldermore has established itself as a key supporter of professional landlords and homeowners that do not fit the cookie cutter approach of many providers, with our award-winning savings proposition offering competitive rates over the long term.
“Going forward, we aim to broaden our offering, further helping individuals to achieve their goals, and Sue’s experience and knowledge will play a key role in our future development.
“The business is well positioned in providing mortgages to customers who are overlooked by mainstream lenders, such as the self-employed, contractors or independent workers, who are an increasing part of the UK working population.”
Swap rates lifting as projected rate rises loom – Maddox
The Monetary Policy Committee’s February vote – the first of 2018 – was as the markets expected, with every member of the panel seeking to maintain the current base rate.
However, the committee indicated that the next rise could happen soon, due to the sustained high rate of inflation in the UK.
With inflation standing at 3% in January, well above the 2% target, the Bank of England now believes that tightening monetary policy in the short term is the most appropriate measure, given that it is not falling as fast as previously hoped or thought.
Markets are now forecasting that the next 0.25% will take place by May, with another 0.25% increase before the end of 2018.
Swap rates rally
Following the message of a rate hike potentially happening sooner than expected, markets reacted positively, with sterling increasing to $1.40 against the US dollar immediately after the meeting.
The two-year swap rate rallied to more than 1% – its highest level in more than two years (see graph).
By contrast, this was around 76bps following the December rate call and at 90bps in November, shortly before the bank raised the base rate for the first time since 2007.
However, there was a word of warning once again from the central bank as it continued to highlight the economic issues surrounding the UK’s withdrawal from the European Union.
The Bank of England believes any decisions it makes on the base rate will have much less impact on the UK economy, households and businesses than the success of the Brexit negotiations between the UK and Europe.
It also revised its forecast for UK growth up slightly, from its previous prediction of 1.7% to 1.8% on the back of a stronger outlook for the global economy.
Source: Bloomberg, 8th February 2018
Following the guidance issued by the MPC at this meeting, the market now forecasts a 0.25% rise in the base rate within the next six months (see table).
Further rises will see the base rate reach the 1% mark in the next 12 months before rising again to 1.25% in the following year.
The three-month Sterling Libor is expected to trade close to 0.75% in the next six months before reaching 1% within the year.
The data suggests a revised upwards prediction for the two-year swap rate following this month’s developments.
Source: Bloomberg, 8th February 2018. *Using OIS Curve. **Based on the swap curve
Indeed, two-year swap rates are forecasted to remain at 1% for around six months, before rising to 1.25% in the summer while the five-year swap rate is expected to increase to 1.5% for the next six months and to trade around 1.75% thereafter.
The 10-year fixed swap rate is expected to be at the 1.75% mark for the next 12 months.
A clearer picture of how the market is looking for the year ahead is now starting to emerge, and over the next couple of months it will be interesting to see how banks and borrowers alike prepare for the next rise.