The decision was approved by a majority of six to three, with the dissenting members supporting
a 0.25% increase to 5.5%. This is the third pause in the BoE’s hiking cycle and comes after
fourteen consecutive rises from 0.1% in December 2021. The Bank’s current rate remains its
highest in fifteen 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 latest UK inflation data for the twelve months to October reported a fall to 4.6%, 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% month-on-month (MoM) and services inflation fell more softly than expected at -0.3% MoM. Inflation is
anticipated to fall more modestly in the November release, with market participants estimating a
0.2% decline. In the BoE’s modal projection, inflation is expected to return to the 2% target by the
end of 2025.
UK GDP was flat in Q3 of this year, although MoM saw a fall of 0.3% 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% previously anticipated. Based on the
latest surveys of bank staff, GDP is expected to see growth of c.0.25% in 2024, weaker than
previous predictions.
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% LTV mortgage, high street lenders are now offering two-year
fixed rate products from 4.77% and five-year fixed rate products from 4.58%, 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% 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%.
| Forecast in rates |
| Effective Rate | 1mth time | 3mth time | 6mth time | 12mth time | 2yrs time | 3yrs time |
| Bank of England Base Rate* | 5.25% | 5.14% | 4.84% | 3.91% | 3.34% | 3.21% |
| 2yr Fixed Rate** | 4.20% | 4.05% | 3.83% | 3.53% | 3.27% | 3.18% |
| 3yr Fixed Rate** | 3.91% | 3.80% | 3.65% | 3.42% | 3.23% | 3.18% |
| 5yr Fixed Rate** | 3.62% | 3.55% | 3.46% | 3.32% | 3.22% | 3.22% |
| 10yr Fixed Rate** | 3.49% | 3.47% | 3.43% | 3.39% | 3.38% | 3.42% |
* 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
100bps 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%. This suggests that the market
believes rates will stabilise for an extended period. The ten-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
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 RMBS mezzanine notes
placed by UK issuers this year.
In 2023, there has been just over £16.5 billion of UK RMBS paper placed into the market
compared to approximately £22 billion at this time last year, although c.£12 billion of that was
legacy paper.
This article was originally published on https://www.mortgagesolutions.co.uk on 18th December 2023
Alex Maddox is responsible for Capital Markets Execution and Digital Strategy for Kensington. Alex joined the business in August 2012 and prior to that was Head of European Residential Mortgage Trading at Deutsche Bank and was on the board of DB UK Bank and had responsibility for the DB mortgages platform in Chester. Previously, he was the Head of European Securitised Products for Citadel hedge fund. Prior to that Alex spent nearly 14 years in investment banking, starting as a derivatives trader and finishing as Head of Securitised Products Trading.