The Bank of England raised rates. Swap rates fell.

A rate rise that made fixing cheaper

Yesterday the Bank of England raised the Bank Rate by 0.25% to 4.00%, its first rise in more than three years. Yet over the same week, the cost of fixing your borrowing for five years fell.

The 5-year SONIA swap rate closed last Friday at 4.73%. This morning it was trading at around 4.57%, roughly 0.16% lower, despite the hike.

Markets trade on tomorrow, not today

Swap rates reflect where markets expect interest rates to be over the whole life of a hedge. By the time the Bank announced its decision, a 0.25% rise had been priced in for weeks. The decision itself barely registered: the 5-year swap rate rose briefly at midday, then settled back.

The same is true of the next meeting, on 17 December. Markets already price around three further rises by late 2027, so the Bank’s next decision is already built into the price of hedging today. What moves that price is news that changes expectations, not the announcement itself.

What actually moved rates this week

The fall came from across the Atlantic, not from Threadneedle Street.

•         The US midterms. Democrats’ sweeping wins gave them control of Congress, which investors saw as limiting further deficit-funded spending. US Treasury yields fell and gilts followed: the 10-year gilt yield dropped to around 5.1% on Thursday, its lowest since late August.
•         The AI trade unwinding. Voters backed restrictions in 39 of 45 local ballot measures on data centres, raising doubts about the AI investment boom. On Thursday the Nasdaq fell 4.8% at one point and Nvidia 8.2%, as investors moved money into safer government bonds.

What this means for your borrowing

Bank Rate still matters if your debt is unhedged. Floating-rate loans reprice almost straight away, so yesterday’s rise adds £25,000 a year to the interest on a £10m loan.

But when it comes to deciding whether to hedge, the next Bank of England meeting is not the thing to wait for. Its likely outcome is already in today’s swap rates. Waiting for the decision is really a bet that the market has got it wrong.

A rare window to lock in

It is unusual for swap rates to fall in the same week the Bank of England raises rates. It took US politics and a sharp sell-off in AI stocks, both pushing investors towards government bonds, to make it happen.

That may not last. The Bank now expects inflation to peak at 4.9% in mid-2027, and Governor Andrew Bailey warned that more rises may be needed without real progress towards settling the conflict in the Middle East. If the rush into bonds fades, or energy prices climb again, this week’s fall could quickly reverse.

For borrowers with floating-rate debt, or hedges expiring in the next year or two, this dip is a chance to secure certainty at lower levels than a week ago.

How Vedanta Hedging can help

Since 2011, Vedanta Hedging has given UK businesses independent, FCA-authorised advice on interest rate, currency and commodity hedging. We can help you:

•         understand your exposure: what further rate rises would mean for your cash flow and loan covenants
•         choose the right hedge: compare swaps, caps and collars against your business plan
•         act when the window opens: set target rates and let us monitor the market for you
•         get a fair price: benchmark the pricing your bank offers and negotiate on your behalf

Windows like this one don’t stay open for long. To talk through your interest rate exposure, get in touch with our team at vedantahedging.com.

Parag Kothati