Gilts rally as Bank of England keeps the base rate unchanged

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.

• 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.

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