Why Bank Rate isn't the rate that sets your hedging costs

The rate in the headlines isn’t the rate you pay

Every Bank of England rate decision makes the news, and many borrowers time their hedging decisions around it. But Bank Rate only tells you what money costs overnight.

When you fix your borrowing costs with an interest rate swap, the price depends on what money is expected to cost over the whole term of the hedge. That price comes from the SONIA swap curve, and it can move very differently from Bank Rate.

What actually sets the cost of a hedge

SONIA is the overnight rate at which banks lend sterling to each other, and it closely tracks Bank Rate. Many UK floating-rate loans are priced at SONIA plus a margin.

A SONIA swap lets you exchange that floating rate for a fixed one. The fixed rate reflects where the market expects SONIA to average over the term, plus a premium for the uncertainty.

Set those fixed rates side by side for 1, 2, 5 and 10 years and you have the SONIA swap curve, also called the OIS curve. It is this curve, not Bank Rate, that tells you what certainty costs.

Why swap rates and Bank Rate can move in opposite directions

Swap rates are forward-looking. They move as soon as expectations change, often months before the Bank of England acts, and sometimes against its latest decision.

The main drivers include:

Inflation: including energy prices, which can quickly change the outlook for interest rates
Economic growth: stronger-than-expected data can push expected rates higher
Government borrowing: Budgets and gilt issuance affect longer-term rates
Global markets: moves in US and European rates, equity markets and geopolitical events all feed through to sterling rates

The 12 months to October 2026 show how far apart the two can drift. Bank Rate was cut from 4.00% to 3.75%, yet 5-year SONIA swap rates rose by almost a full percentage point.

Forecasts don’t set the price of a hedge

Economists and the Bank of England regularly publish views on where rates are heading. These can differ sharply from what the market has already priced in.

When you hedge, you lock in the market’s price on the day, not a forecast. Waiting for a forecast to come true is a bet on the outcome, not a hedge against it.

What this means for borrowers

Whatever the outlook, some situations call for early attention.

Floating-rate borrowers: unhedged debt leaves your costs exposed to wherever rates go next.
Hedges expiring in the next 12–24 months: the rate available to replace your hedge may be very different from the one you have now. Planning early gives you more options.
New borrowing or refinancing: lenders may require a hedge, and its cost can change a deal’s numbers. Build it into your plans from the start.

Rates rarely move in a straight line. During 2026, 5-year swap rates fell by 0.30% or more within a few weeks on several occasions, even as the overall trend was upward. Borrowers with target levels agreed and approvals in place are the ones who can act when those windows open.

How Vedanta Hedging can help

Vedanta Hedging gives businesses and property investors independent advice on managing interest rate risk. We can help you:

understand your exposure and compare the options, from swaps to caps and collars
set target rates that fit your business plan and cash flow
monitor the market on your behalf, so you can act quickly when an opportunity appears
benchmark the pricing you’re offered, so you know you’re paying a fair rate

The headline rate rarely tells the whole story. To talk through your interest rate exposure, call our team on 0207 183 2277 or visit vedantahedging.com.

Important information

This article is for general information only and does not constitute financial advice. Past rate movements are not a guide to future movements. Vedanta Hedging Ltd is authorised and regulated by the Financial Conduct Authority.