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Hedge against Truss’s policies?

Financial markets are expecting the Bank of England Base Rate to rise from the current level of 1.75% to 4% by May next year. This means that the cost of borrowing including mortgage repayments will more than double for households and businesses.

Professor Patrick Minford, one of Liz Truss’s advisers, has said that interest rates could rise to 7% and would be a “good thing”.

Rising energy prices and persistent increases in forecast inflation have both led to sharp upward movements in swap rates. Mortgage lenders have raised their fixed rates with their average two-year fixed rate now at above 4%. 

Inflation at above 10% for the first time in 40 years and forecasts of inflation peaking above 20% at the start of next year certainly warrant effective action of some sort. There has been strong criticism from many on the Bank of England’s ‘slow’ response to inflation suggesting that there should have been much faster rate rises. Hindsight is a wonderful thing. But the important questions now are how high will rates go and how effective will these rate rises be?

Tackling inflation will certainly be at the forefront of the next prime minister’s targets and any measures taken to reduce energy bills will certainly help to contain inflation. Regardless of Liz Truss’s plan to curb the Bank of England’s independence, it seems fairly certain that further rate hikes are imminent. However, increasing interest rates just at the point now when the economy is at risk of falling into recession will only exacerbate the struggle already being faced by households and businesses.

We are asked daily by clients about where rates are heading and our answer is always the same: no one knows.

What is important is to be knowledgeable about the hedging options available to you, whether they are with your lending bank or via an independent cap provider. Please click here to view our article on independent interest rate caps.

We wrote in our previous post that borrowers on a variable rate will have seen an increase in their quarterly/monthly payments. This is true once again after the recent rate hike to 1.75%. 

You can view GBP swap rates on our Daily Market Rates sheet by clicking here.

To give you a feel for current pricing, a five-year SONIA cap for £5M protecting 3.50% will cost approximately £285K.

Please get in touch with any questions you may have and a member of our team will be able to assist you.

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