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Market Update

Gilts rally as Bank of England keeps the base rate unchanged

Date:
November 3, 2023

Summary

Rates fall as markets react to the Bank of England's (BoE) Monetary Policy Committee's (MPC) decision, Eurozone inflation falls below consensus, and more in today's fortnightly.

Market update

Economic news

  • The BoE kept U.K.’s benchmark rate unchanged at 5.25% for the second consecutive meeting. Of the nine committee members, three voted for a 25-basis-point hike.
  • Inflation is now forecasted to be higher in the medium-term, alongside a stagnant growth outlook, according to the revised monetary policy report.

Source: Bank of England

  • While the impact of monetary tightening has become more apparent, the BoE suggests that rate cut talks are “too early” given upside risks to inflation projections.
  • The European Central Bank (ECB) also voted against another rate hike, leaving the deposit and refinancing rates at 4.00% and 4.50% respectively.
  • The decision preceded the data showing Eurozone’s inflation declined more than expected to 2.90% in October, from 4.30% in September and against consensus of 3.10%.
  • In line with market expectations and other central banks, the U.S. Federal Reserve held their key funds target rate range at 5.25%–5.50%.
  • In October, the U.K.'s composite Purchasing Managers Index (PMI) came in at 49.5. While marginally higher than the preliminary print of 49.2, it remains below the 50 level dividing growth from contraction.
  • Due to weak sales and concerns about demand outlook, service providers cite a lack of new business opportunities and redundancies/non-replacement of leavers.

Sterling rates markets

  • Gilt yields and SONIA rates have declined over the past fortnight. There have been increased investor bets that the rate-cutting cycle will have to commence quicker than the BoE suggests.
  • The 30-year gilt has fallen c.33 bps from a 5.11% high observed on 20 October, down to 4.77% by 3 November.

Source: Bloomberg, Chatham Financial

Source: Bloomberg, Chatham Financial

Bank market

  • Unsecured facilities remain available to housing associations.
    • Lenders prefer to see a clear strategy to move the majority or their entire debt portfolio to an unsecured basis.
  • Unsecured facilities in the sector still require unencumbered asset tests, thereby having uncharged security against it.
  • However, it provides housing associations some capacity if they are facing security constraints.
  • Lenders are placing larger scrutiny on regulatory ratings, both for secured and unsecured facilities. While many have accepted V2 ratings for viability, there is a price differential between G1- and G2-rated housing associations. In some cases, G2 ratings are impacting the ability of lenders to extend financing regardless of price.

Indicative pricing

*including on cost

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Disclaimers

This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.