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Market Update

The end nears for Bank of England's tightening cycle

September 25, 2023


An economic update, the Bank of England (BoE) keeps the base rate unchanged in the September meeting, Chatham advises a £370M refinance package, and more in today's fortnightly.

Market update

Economic news

  • The past fortnight saw signals that the BoE may be at the end of its rate hike cycle, as data releases are starting to show signs of monetary policy taking effect.
  • The U.K. labor market data showed cooling trends, with July unemployment at 4.30%, slightly up from 4.20%. Average earnings, excluding bonuses, held steady at 7.80% — while those including bonuses saw slight growth — reaching 8.50% compared to the previous 8.40%.
  • July's GDP contracted by 0.50%, following June's 0.50% growth. This was primarily driven by a 0.50% decline in services output.
  • CPI figures in August dipped to 6.70% from July's 6.80%. More significantly, core-CPI dropped to 6.20% from 6.90%, breaking its c. 7.00% trend since March.

Source: ONS

  • Ahead of the BoE rate decision, markets were evenly split on a 25-basis-points hike or to hold at 5.25%.
    • However, recent data releases led to the decision to maintain the base rate at 5.25%.
  • The vote was split five-to-four in favor of no further rate hikes for the September meeting.
  • Notably, the committee opted to reduce U.K. government bond purchases by £100 billion over the next year, bringing the total balance sheet to £658 billion. This will result in a contraction of the money supply within the economy, a form of monetary tightening.
  • The decision also tempered expectations for the peak terminal rate, lowering it by c. 20 bps and suggesting that elevated rates will persist for an extended period.

Source: Bloomberg, Chatham Financial

Sterling rates markets

  • The release of inflation figures caused gilt yields to come down by c. 15 bps up to 15-year maturity, with the long end of the curve coming down by six-to-ten basis points.
  • The BoE decision to keep the base rate unchanged caused a sell-off, increasing yields in the medium-to-long end of the curve by c. six basis points — where it settled.

Source: Bloomberg, Chatham Financial

Housing association (HA) spreads

  • HA secondary spreads continue to widen since their year low in early August, although the increase is small.
  • Notably, the Tier 1 and Tier 2 differential have widened, while the Tier 2 and Tier 3 differential tighten.
    • This shift could be attributed to current investor sentiment, treating credits on the BBB/Baa threshold with a negative outlook similar to actual BBB/Baa credits.
    • This stems from recent downgrades, with credit rating agencies adopting a tougher stance toward the sector as a whole.

Source: Bloomberg, Chatham Financial

Source: Bloomberg, Chatham Financial

Bank market

  • emh Group (S&P: A+, Negative) secured a £370M refinancing package, including a mix of bank and capital markets funding. This included:
    • Banking: refinancing of £180M in existing debt, with a further £90M of new funding across both Lloyds and NatWest.
    • Capital Markets: a total of £100M retained bond sales, sold in two £50M traches. The tight spreads reflect investors' confidence in emh’s long-term viability, despite the challenging macro environment.
  • Chatham worked closely with the emh team to expand the organisation's capacity to deliver the asset management and development aspirations set by the board.

Capital markets

  • There has been no standalone HA issuance over the past fortnight.
  • We saw Southern Gas Network (Baa1/BBB) issue £500M off their EMTN programme in two parts.
    • This included a £200M tap of their 1.25% 2031 issue. It priced at +190, only tightening five basis points from the IPT of +195, with books reported at 1.58x.
    • There was a £300M 11.5Y issue, priced at +200. This also only tightened by five basis points from IPT at +205, with books reported at 1.63x.
    • The £200M tap re-offer price was 67.87 — a significant discount to par. This discount did not result in a materially tighter issuance spread, despite the overcollateralisation on the tap.
  • The lacklustre demand and lack of tightening from IPT may have been due the tenor of the issue.

Indicative pricing

*including on cost

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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.