Bank Holds Interest Rates But Hedging Costs Keep Rising

Bank Holds Interest Rates But Hedging Costs Keep Rising

Bank of England Holds Rates at 3.75%

On 19 March, the Bank of England held rates at 3.75% after six cuts since August 2024. The decision was expected, but the detail mattered more. The Monetary Policy Committee voted unanimously (9–0) to hold — its first unanimous decision in four-and-a-half years. That points to a clear preference to pause and assess developments.

The tone was also more cautious. Policymakers now expect inflation to rise to around 3.5% in March, as conflict in the Middle East pushes up oil and gas prices and adds pressure to the inflation outlook. Inflation is still below its recent peak, but the shift in tone shows the Committee is more alert to upside risks.

Markets vs Economists: A Growing Disconnect

Markets have flipped. A few weeks ago, they were pricing in two rate cuts this year. Now they are pricing in around three hikes, with roughly a 66% chance of a 25bps move at the next MPC meeting on 30 April.

Economists are far less convinced. Most still expect the Bank to stay on hold. Some even think the next move could still be down if weaker growth and softer labour market conditions outweigh the inflation hit from higher energy prices.

Part of the gap is interpretation. Markets took the Bank’s message as hawkish. Many economists saw the unanimous vote as caution in the face of uncertainty, not a clear signal that hikes are coming.

Markets Have Repriced Sharply

The shift in market pricing is clearly visible in swap markets. Since 27 February, both the 3-year and 5-year tenors have moved materially higher:

The GBP 3-year swap rate has risen from 3.40% on 27 February to around 4.23% today, an increase of 0.83%.
The GBP 5-year swap rate has risen from 3.52% on 27 February to around 4.20% today, an increase of 0.68%.

Higher swap rates and greater volatility have also pushed up cap pricing. Looking at indicative mid-market pricing for a £5m SONIA cap today versus 27 February, premiums have increased materially.

The 5-year 4% cap has risen by 190%, from c.£58k to c.£168k
The 3-year 4% cap has risen by 532%, from c.£15k to c.£94k

What This Means for Borrowers

For borrowers with floating rate debt, this highlights how quickly cap pricing can move when volatility picks up, and why waiting to protect yourself can prove expensive.

In this market climate, negotiating tight spreads with your bank or hedge counterparty is more important than ever. At Vedanta Hedging, we work to ensure clients are receiving fair pricing and competitive spreads. If you are considering interest rate hedging to protect against rising rates, feel free to reach out.

Next Steps

To view current market rates, see our Daily Market Rates sheet.
Want to learn more about interest rate hedging? Get in touch and a member of our team will assist you.
If you haven’t already, read our recent article called Stronger Dollar, Smarter Hedging: Turning Volatility into Opportunity.

You can reach us on 0207 183 2277 or at info@vedantahedging.com.